A lot of institutions as well as high net-worth individuals like to earn high returns compared to somebody else. The traditional investments including bonds and stocks do not typically earn an ROI and private companies. However, such investors never purchase companies directly. They actually invest through a private equity firm. For you to earn better than usual returns, you can consider a private equity fund.
For you to understand the concept of GP or General Partners and LP or Limited Partners, it is necessary to know how the private equity firm works. Once a private equity firm is established, it’ll have investors who’ve purchased Partnership Interest using their money. The private equity firm makes funds through that money and such funds contain capital used to begin or buy companies. Investors who have invested in every fund would be referred to as LP or Limited Partners and it’d led by a GP or General Partner.
Limited Partners – Who Are They?
The external investors in private equity funds are called LP or limited partners. Their liability is actually is limited to the extent of the invested capital. Not all may invest in private equity firm. Typically, the investors need to put $250K or more to the fund. Majority of private equity firms have investors including insurance companies, labor unions, pension funds, big wealthy families, foundations, university endowments, and so on.
The Limited Partners will give money to private equity firm through buying Partnership Interest and expect returns for it. Private equity performed far better compared to the public market in the past. Limited Partners invest their money and they are not involved with the fund management. This management is actually carried out by General Partner.
General Partner – Who is It?
If funds are made, you only need someone to manage it. It’s done by the GP or General Partner. All of the decisions for the fund of private equity are made by General Partner. These decisions may include which companies to sell or buy, what kind of companies to start, and more.
General Partner is basically paid either by way of a fixed compensation or management fee. Management fees are simply a percentage of the overall amount of the assets or capital of the fund. This percentage is not flexible and fixed. Generally, this fee actually ranges from 1-3 percent yearly of the committed capital. The management fees are stated as a percent each year of the assets under management.
General Partner or GP also gets a performance fee if she or he earns you lots of money. It’s done through the use of returns distribution waterfall. Other than their meager salaries, GPs also earn carry or carried interest. It’s the percentage of profits that funds earn on the investments. Performance fee is the other name for carried interest. It’s a fee charged based on overall amount of the profits that have been earned by the fund that particular year. In short, performance fee is the share of the net profits of the fund, which should be paid by GP.