When you work around private equity, almost everything you touch is shaped by one structure: the fund. Capital call notices, quarterly reports, fee calculations and investor questions all follow from how the fund is set up and what its governing document says.
PC101 introduced the general partner (GP) and the limited partner (LP) for private credit funds. Private equity funds use the same model. This lesson goes further: the legal entities behind "the GP", what LPs sign up to, and the fund's fixed life.
The limited partnership
Most private equity funds are set up as limited partnerships. A limited partnership is a legal arrangement with two kinds of partner:
- The general partner (GP): the manager that runs the fund and makes its investment decisions.
- The limited partners (LPs): investors in the fund who provide capital but do not run it.
The word "limited" refers to limited liability. An LP can lose the money it has put in, and any money it has agreed to put in, but no more. If the fund owes money it cannot pay, creditors cannot come after the LP's other assets.
That protection has a condition. LPs must not take part in running the fund's business. If they did, they could risk losing their limited liability. So LPs vote on certain matters set out in the fund's terms, and many sit on an advisory committee, but they leave day-to-day investment decisions to the GP.
The general partner is in a different position. It has unlimited liability for the partnership's debts. For that reason, the GP is commonly a special-purpose company set up just for that fund, rather than the manager's main business. If something went wrong, the exposure would sit in a company with few other assets.
Who is "the GP"?
In everyday speech, "the GP" means the private equity firm. Legally, the firm usually works through several entities. Take the course's fictional buyout firm, Ashcombe Capital, and its first fund, Ashcombe Capital Fund I:
| Entity | What it does | Example |
|---|---|---|
| The fund | The limited partnership that owns the investments | Ashcombe Capital Fund I |
| The general partner | Legally controls the fund; has unlimited liability | A special-purpose company set up for Fund I |
| The management company | Employs the investment team, acts as the fund's adviser and receives the management fee | Ashcombe Capital's management company |
| The LPs | Commit capital and share in the returns | Pensions, endowments, insurers and others |
The management company is the firm's operating business. It employs the partners and staff, pays the office rent and advises the GP on which deals to do. In return it receives the management fee from the fund. Lesson 2.3 covers fees and the GP's share of profits.
The GP's side also usually invests its own money in the fund, called the GP commitment. It is commonly a small share of the fund, often cited at around 1–2%, though it varies. The point is alignment: if the fund does badly, the team loses money too.
The limited partnership agreement
The limited partnership agreement (LPA) is the fund's governing contract. Every LP and the GP sign it. It covers, among other things:
- the fund's term and investment period
- the investment strategy and limits, such as how much can go into one company
- how capital is called and how distributions are made
- fees, expenses and the GP's share of profits
- what happens if key people leave, or if an LP fails to pay a capital call
- reporting to LPs and what LPs can vote on
Large LPs often negotiate extra terms that apply only to them. These go in a side letter, a separate agreement between the GP and one LP. A side letter might give an LP more detailed reporting, a fee discount, or the right to be offered co-investments. Operations and investor relations teams track side letter terms closely, because they change what each LP receives.
A fixed life: the closed-end fund
A private equity fund is a closed-end fund. It raises money during a fundraising period, then stops accepting new investors. LPs cannot withdraw their money early.
The fund also has a set life. A common pattern:
| Phase | Typical length | What happens |
|---|---|---|
| Fundraising | Months, sometimes longer | The GP gathers commitments, often over several closings |
| Investment period | Commonly about five years | The fund buys companies |
| Holding and exits | The remaining years | The GP improves companies and sells them |
| Extensions | Often up to two one-year extensions | Extra time to finish exits, usually with LP consent |
The whole term is commonly 10 years from the start, with possible extensions. Terms vary, and some strategies use longer lives.
A fund's life is a cycle, not a single event. Toward the end of one fund's investment period, a firm commonly starts raising its next fund. So Ashcombe Capital might later raise Fund II while Fund I is still selling its companies.
Blind-pool investing
When an LP commits to Ashcombe Capital Fund I, the fund has usually not bought anything yet. The LP does not know which companies it will end up owning. This is called blind-pool investing.
The LP is really backing a strategy and a team. That is why LPs spend so much effort assessing a manager before they commit (lesson 2.4 covers what they look for). The LPA gives some protection: it limits what the fund can invest in, and it commonly includes a key person clause, which can pause new investments if named senior people leave.
Later, when Ashcombe buys a company such as Northfield Components, LPs learn about it through the fund's reporting. They do not usually get a vote on individual deals.
Parallel funds and feeders
Not every investor can sensibly invest in the same entity. A tax-exempt pension, an overseas investor and an insurer may each face different tax or regulatory rules.
To handle this, funds commonly use extra vehicles:
- Parallel funds invest alongside the main fund, deal by deal, on broadly the same terms.
- Feeder vehicles pool money from a group of investors and invest it into the main fund as a single LP.
These are usually managed as one program with the main fund. For operations teams, it means one "fund" can involve several legal entities, each with its own accounts and investors. Separately managed accounts (SMAs), portfolios run by a manager for a single investor, are another option for the largest LPs.
Key terms
- Limited partnership: A legal structure with a general partner that runs the business and limited partners whose liability is limited.
- General partner (GP): The manager that runs a fund and makes its investment decisions; legally, often a special-purpose company with unlimited liability.
- Limited partner (LP): An investor in a fund who provides capital but does not run it.
- Management company: The firm's operating business, which employs the team, advises the fund and receives the management fee.
- Limited partnership agreement (LPA): The contract that sets the fund's terms for the GP and all LPs.
- Side letter: A separate agreement giving one LP terms in addition to the LPA.
- GP commitment: The GP side's own investment in the fund.
- Investment period: The part of a fund's life, commonly about five years, in which it makes new investments.
- Blind pool: A fund whose investors commit before the specific investments are known.
- Parallel fund / feeder vehicle: Extra vehicles that let investors with different tax or regulatory needs invest in the same program.
Key takeaways
- Private equity funds are commonly limited partnerships: the GP runs the fund, and LPs provide most of the capital with limited liability.
- Because the GP has unlimited liability, it is commonly a special-purpose company; the management company employs the team and receives the fee.
- The LPA sets the terms for everyone, and side letters add terms for individual LPs.
- Funds are closed-end, with a term commonly of 10 years and an investment period of about five.
- LPs invest in a blind pool, so they are backing a team and a strategy rather than known companies.
This lesson is for educational purposes only and is not investment advice.