Glossary · Ecosystem and support · Updated
LPs, or limited partners, are the investors who entrust their money to a fund. GPs, or general partners, are the fund's partners who make investment decisions and manage the portfolio. Understanding the distinction explains most of an investor's behaviour in a meeting.
When a fund invests in you, it is not investing its own money. It is deploying its limited partners' capital, to whom it has committed a return over a horizon. Every decision is therefore filtered through a question you never hear asked out loud: how will I explain this investment to my LPs in eight years?
How GPs are paid explains their choices. Management fees, around 2% per year, cover the team and running costs but are not the prize. The prize is carried interest, a share of gains paid only after capital has been returned in full to LPs, and often after a minimum return known as the hurdle.
That structure explains two behaviours founders find puzzling. A GP looks for holdings capable of returning the entire fund alone, which makes them indifferent to profitable but capped businesses. And they become insistent about exits in a fund's final years, because their own commitments are coming due.
Example: the economics of a €100M fund
A mid-sized European fund, from the point of view of its subscribers and its partners.
| Fund size | €100,000,000 |
|---|---|
| Typical LPs | public investors, insurers, family offices, corporates |
| GPs' own commitment to the fund | 1% to 2% of fund size |
| Management fee to the GPs | around 2% per year |
| Fund life | 10 years, extendable by 2 |
| Capital called from LPs | progressively, as investments are made |
| Hurdle before carried interest | often an 8% annual return |
| Carried interest | 20% of gains above the hurdle |
GPs commit their own money at 1% to 2% of the fund. Small in absolute terms, but it is what assures LPs that the team genuinely shares the risk rather than living off management fees.
The common mistake
Reading a rejection as a verdict on your company. A fund at the end of its investment period, with reserves already committed or a thesis that does not cover your sector, will decline an excellent business for reasons that have nothing to do with you.
Frequently asked questions
What is the difference between LP and GP?+
LPs provide the money without taking part in investment decisions; they are institutions, family offices or corporates. GPs run the fund, select the holdings, sit on boards and report performance back to the LPs.
What is carried interest?+
The share of gains going to the fund's partners, typically 20%, paid only after LPs have recovered all committed capital and often a minimum return. It is the GPs' main source of income and what aligns them with very large exits.
Related terms
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