What Is an LP and a GP? (Limited and General Partners)

Read anything about private equity, venture capital or hedge funds and two terms appear constantly: LP and GP. They are the two roles at the heart of nearly every private fund, and the relationship between them is the basic building block of private markets.

The two roles

Most private funds are structured as a limited partnership, which has two kinds of partner:

• The general partner (GP) is the firm that runs the fund. It raises the money, makes the investment decisions, manages the assets, and carries legal responsibility for the fund. When you hear a private equity or venture firm's name, that is the GP.
• The limited partners (LPs) are the investors. They provide the great majority of the capital, but stay passive: they do not run the fund or choose its investments. In exchange, their liability is limited to the money they commit, hence the name.

In one line: the GP manages, the LPs fund.

Who the LPs are

The limited partners in serious funds are the large pools of long-term capital: pension funds, university endowments, insurance companies, sovereign wealth funds, and wealthy families and their family offices. A family office allocating to a private equity fund is acting as an LP.

How the money and incentives work

The GP puts in a small slice of its own capital (aligning it with the LPs) and is paid on the classic 2 and 20 model: a management fee of about 2 percent of assets a year to run the firm, plus carried interest of about 20 percent of profits, usually above a hurdle rate, as its performance reward. This is where a GP's partners build their fortunes, and why understanding the fee split matters so much to an investor. See What Is Carried Interest?

Why families increasingly want more than LP status

Being an LP is simple but expensive and passive. This is why sophisticated family offices increasingly push beyond it, negotiating co-investment rights to invest directly in deals at reduced fees, or building the capability to do direct deals themselves, moving from pure LP toward the GP side of the table. See What Is Co-Investment? and How Do Family Offices Invest?