Private Equity - General Partners, Limited Partners - why are they structured like this and who does what?
If you're evaluating a private equity fund as a wholesale investor, you'll be dealing with two key roles: GP (General Partner) and LP (Limited Partner). Understanding how they're structured and aligned is critical to assessing whether the fund is worth your capital. NB: this is most relevant for traditional private equity investors, as opposed to evergreen funds which would usually have a PIE or other fund structure for investor convenience.
This content is general information and is intended for wholesale investors as defined under the Financial Markets Conduct Act 2013. Retail investors should seek personalised advice. EriksensGlobal Limited is a Financial Service Provider (FSP40147) and is licensed to provide financial advice. Author Amy Eriksen is a registered Financial Adviser with experience in institutional and personal investment strategies and advice.
The Structure: Risk, Decisions and Dollars
Here's the reality. In private equity, both the GP and LP are taking on risk. But they're taking it on in different ways.
Limited Partners (LPs) are you. You commit capital. That capital is at risk. You can lose what you put in.
General Partners (GPs) make the investment decisions, manage the portfolio, and take operational risk. But they also commit their own capital and their reputation to the fund. That matters.
Both parties should have “skin in the game,” and if the GP isn't substantially invested, that misalignment is a red flag to us as advisers.
Why It Works
Private equity is illiquid, concentrated, and long-term. Without proper alignment, you'd have a GP spending your money with little consequence if things went wrong. The structure prevents that.
For you (the LP): Your liability is limited to your capital contribution. That's a legal boundary. If a portfolio company faces a lawsuit or regulatory breach, you're not personally liable. The GP bears those operational risks as the managing entity.
For the GP: They commit their own capital alongside yours. They earn management fees to cover costs (the ‘norm’ is 2% but cheaper options are available), and the big return comes through carried interest (typically 15–20% of profits over a certain hurdle) paid only after LPs have received their committed capital back plus a hurdle rate (often 8%, but it can be higher - and the higher it is the more profit you as the investor keep). So the economics are built on fund performance, not just asset management.
The GP has a downside if things go wrong (they lose their capital and don't earn ‘carry’). They have an upside if things go well (they earn carry on top of management fees). That alignment is what makes the structure credible.
What This Looks Like in Practice
Capital. You commit capital to the fund. The GP also commits capital, typically 1–3% of the fund size but more can be a good sign (or a sign of undersubscription - that’s something to talk to your adviser about). This is a non-negotiable and is standard across quality managers.
Management fees. The GP charges an annual fee (usually 1.5–2.5% of assets under management) to cover the cost of managing the fund: staff, deal sourcing, due diligence, and administration. The fee can decrease after a certain investment period, representing the unequal nature of initial research vs ongoing costs. This is paid regardless of performance - so you need to be expecting an excess return above your other options - otherwise it’s a very expensive (and risky) ‘hobby.’
Carried interest. Once the fund has returned your capital plus the hurdle rate (say, 8% per annum), the GP takes carry – typically 20% of profits above that threshold. This is where they make their money, but If you're evaluating a private equity fund as a wholesale investor, you'll be dealing with two key roles: GP (General Partner) and LP (Limited Partner). Understanding how they're structured and aligned is critical to assessing whether the fund is worth your capital.
The Structure: Risk, Decisions, and Capital
Here's the reality. In private equity, both the GP and LP are taking on risk. But they're taking it on in different ways.
Limited Partners (LPs) are you. You commit capital. That capital is at risk. You can lose what you put in.
General Partners (GPs) make the investment decisions, manage the portfolio, and take operational risk. But they also commit their own capital and their reputation to the fund. That matters.
Both parties have skin in the game. That's the whole structure.
Why It Works
Private equity is illiquid, concentrated, and long-term. Without proper alignment, you'd have a GP spending your money with little consequence if things went wrong. The structure prevents that.
For you (the LP): Your liability is limited to your capital contribution. That's the legal boundary. If a portfolio company faces a lawsuit or regulatory breach, you're not personally liable. The GP absorbs those operational risks as the managing entity.
For the GP: They commit their own capital alongside yours. They earn management fees to cover costs, but the big upside comes through carried interest (typically 15–20% of profits) paid only after LPs have received their committed capital back plus a hurdle rate (often 8%). Their economics are built on fund performance, not just asset management.
The GP has a downside if things go wrong (they lose their capital and don't earn carry). They have an upside if things go well (they earn carry on top of management fees). That alignment is what makes the structure credible.
What This Looks Like in Practice
Capital. You commit capital to the fund. The GP also commits capital, typically 1–3% of the fund size. This is non-negotiable and is standard across quality managers.
Management fees. The GP charges an annual fee (usually 1.5–2.5% of assets under management) to cover the cost of managing the fund: staff, deal sourcing, due diligence, and administration. This is paid regardless of performance.
Carried interest. Once the fund has returned your capital plus the hurdle rate (say, 8% per annum), the GP takes carry – typically 20% of profits above that threshold. This is where they make real money, but only if performance is strong.
Information and governance. As a wholesale investor, you have rights. You can sit on advisory committees, receive quarterly and annual reports, and vote on material decisions. You're not managing the fund, but you're not in the dark either.
Why This Structure Exists in Private Equity
Private assets are fundamentally different from listed equities. When you invest in an listed company, like something on the NZX, ASX or US stock markets, the business is regulated and audited. You can sell your shares on demand. Risk is somewhat transparent and contained, and your ‘owner’s responsibility’ is pretty confined to proxy voting on a couple of items each year for the AGM.
In private equity, you're buying stakes in private companies. These businesses aren't publicly regulated. If something goes wrong operationally or financially, there's no easy exit and the owners and directors are liable for a lot of eventualities. The portfolio company could face litigation, regulatory action, or operational failure. As an LP, you need to know that the GP is exposed to those risks too – that they're not just collecting fees while you bear the consequences. The “limited” partner has limited loss, limited risk, limited responsibility.
In short, the GP/LP structure protects you from operational risk while keeping the GP accountable for investment decisions. The GP decides where the capital goes. The GP also risks their reputation and capital. You provide capital and bear investment risk, but you're protected from operational and business liability.
Assessing a GP: What to Look For
As a wholesale investor, your adviser or investment consultant should evaluate the General Partner carefully. While the structure is well-tested, the quality of the GP is everything and the outcomes of ‘good’ vs ‘bad’ private equity vary wildly. What do we as advisers look for?
Track record. What's their history? Have they delivered returns above the hurdle rate? Have they had any significant failures? Who has invested with them? Is it a first fund?
Capital commitment. How much of their own money are they putting in? You want a meaningful commitment, not a token amount. Is there leverage involved? Are there other backers?
Fee structure. Are the management fees and carry reasonable for the strategy and risk? How does it compare with other options? A 2% management fee plus 20% carry is standard, but some managers charge more or less depending on fund size and track record. The performance - which is largely unknown - will make this either worthwhile or a rip off, so you want as much information about deal flow and skill as possible.
Governance and information. What reporting will you get? How often? What are your voting rights? Can you sit on committees?
Team and stability. Who are the decision-makers, what is their expertise and what are they like? How long have they worked together? What's the succession plan if a key person leaves?
Exit and liquidity. How long is capital typically locked up? Are there secondary sale opportunities if you need to exit? What are the restrictions or gating? There’s evergreens and traditional = and there’s cash drag to consider.
The Long-Term Nature of the Commitment
This matters. Private equity isn't a liquid investment. Your capital is typically committed for 7–10 years. The GP will call capital over time as investments are made, not all upfront, though evergreen funds do exist but they usually use a fund structure to facilitate the liquidity required. Distributions come back as portfolio companies are exited or dividend, but there's no regular income stream like listed equities.
You need to be comfortable with that illiquidity and that timeline before you commit - your adviser can help you make this decision.
Before You Commit
Evaluate the GP on these questions, noting that if you’re a client of Eriksens - we’ve done this for you:
What's their track record across fund cycles? Have they delivered consistent returns above the hurdle rate?
How much of their own capital are they committing to this fund?
What are the fees and carry? Are they competitive?
What governance rights do you have? What's your visibility into decisions?
How long have the key team members worked together?
What's their exit strategy for portfolio companies? How do they create value?
The GP/LP structure is proven. It aligns incentives and protects LP capital from operational risk while keeping GPs accountable for performance. But not all GPs are equal. The quality of the team, their track record, and their skin in the game are what separate a good fund from a mediocre one. if performance is strong.
Information and governance. As a wholesale investor, you have rights. You can sit on advisory committees, receive quarterly and annual reports, and vote on material decisions. You're not managing the fund, but you're not in the dark either. The P in PE doesn’t mean you don’t get information.