The General Partner (GP) manages a private fund, makes investment decisions, and bears unlimited liability for the fund's obligations. Limited Partners (LPs) — pensions, endowments, family offices, and other institutional investors — provide the capital but have no role in day-to-day management and limited liability capped at their investment.
Why It Matters
This is the foundational legal and economic structure of nearly every private equity, venture capital, and many hedge funds — every governance right, fee term, and conflict-of-interest question in a fund's Limited Partnership Agreement flows from this basic division of control (with the GP) and capital (with the LPs).
How It Works in Practice
- 1GPs raise a fund from LPs via a Limited Partnership Agreement (LPA) that sets fees, carry, governance rights, and investment restrictions
- 2GPs typically commit 1-5% of a fund's capital themselves (the GP commitment), aligning their own money alongside LPs'
- 3LPs commit capital that's drawn down over time via capital calls as the GP identifies investments, rather than funded upfront
- 4LP Advisory Committees (LPACs) provide limited oversight and consent rights (conflicts of interest, valuation disputes) without crossing into day-to-day management, which would jeopardize LPs' limited-liability protection
Common Pitfalls
LPs that become too involved in fund management risk losing the limited-liability protection that defines their status — a real legal line, not just a formality
GP-LP information asymmetry (the GP knows far more about portfolio company performance than LPs do between quarterly reports) is a persistent structural tension the LPA's reporting and consent rights are designed to manage
Key-person provisions (triggers if named senior GP investment professionals leave or reduce involvement) are critical LP protections that are easy to underweight during fund due diligence