Private Equity Fund Structure: GP and Management Company

  • Peter Lynch

Why does a private equity fund have both a general partner and a management company? In the lesson titled Private Equity Fund Structure, which is available as part of the Private Equity Training curriculum at ASM, the financial sponsor (entities that control the fund) is defined as follows (please refer to the image below for a visual).

Financial Sponsor (“Sponsor” in image): The team of individuals that will identify, execute and manage investments in privately held operating businesses. This is generally comprised of a General Partner and a Management Company.

  1. General Partner (GP): The entity with the legal authority to make decisions for the fund. This entity also assumes all legal liability.
  2. Management Company (aka fund manager, investment advisor): The operating entity that employs the investment professionals responsible for allocating capital and managing investments.

Private Equity Fund Structure

The management company is generally affiliated with the GP, but they are not the same entity. The GP will enter into a management agreement (or investment advisory agreement) with the management company. Under this agreement the fund pays the management company fees to employ the investment team, evaluate opportunities, manage the portfolio, and manage all day-to-day operations.

This is a common structure that allows the management company to work across multiple funds while still having a GP for each fund. It is not uncommon to see a private equity firm scale and raise new funds in the process. Over time the same management company could be affiliated with a handful of funds (GPs).

The management company owns the firms branded assets and intellectual property, which include the name of the firm, the track record and any proprietary processes the firm has developed. This helps the management company raise new funds and allows it to build goodwill across funds.

In summary, each new fund must have its own general partner, but the accumulation of knowledge and processes resides in the management company providing the private equity firm with economies of scale.