Happy Friday, funds family! Tuning in from Nashville this week, where we’re having a law firm retreat 🥳.

This week, we’ll discuss the almighty “GP” in the context of investment funds and syndications.

🔍️ What is the GP?

The “GP” is the general partner of a fund (or the managing member if the fund is a limited liability company). It refers to the entity—made up of the deal sponsors—that controls the fund, makes investment decisions, and manages the fund’s investments.

The General Partner has two primary functions:

1️⃣ Exercise control over the Fund; and

2️⃣ Receive 🛠️ carried interest. 

For tax and liability purposes (more on that in another article), the GP entity is typically a holding company that doesn’t have employees, doesn’t earn active income, and doesn’t enter into commercial contracts with other businesses. It’s just there to catch carried interest and control the fund. Most of the “business activity” adjacent to the fund is done by an affiliated management company.

🤝 Who is a part of the GP?

The GP is usually a limited liability company whose members are comprised of the fund sponsors. Sometimes, the fund sponsors (members of the GP) may allocate certain economic rights in the fund to junior employees of the management company as part of their compensation. Think of an analyst getting a point of carried interest for each fund or syndication as part of their overall compensation plan. This is typical in the fund world—and a key reason why each fund should have its own separate GP entity.

Large anchor investors may also want to invest in the fund through the GP as part of their 🛠️ strategic negotiations. This would give them access to certain economic benefits (like carried interest) they would not otherwise get as a “normal” limited partner. Sometimes, where multiple operators team up for a particular fund strategy, the GP acts as a programmatic Joint Venture between the two groups.

❓Why have a different GP entity for each fund or syndication?

It’s best practice to form a new GP entity for each new fund or syndication. The primary reason is for liability segregation. In a limited partnership, the general partner has unlimited liability. So we need to “shield” the individual deal sponsors from unlimited liability. One way to accomplish this is by forming a limited liability company to act as the general partner.

But don’t stop there. We want to limit the liability of the general partner to one specific fund. The liability protection of an LLC becomes less and less potent when you have one entity serve as the general partner for several funds. All of a sudden, the carried interest received from Fund #2 becomes fair game to satisfy liabilities from the carried interest of Fund #1. The easiest way to avoid a situation like this is to form a new GP for each fund or syndication.

🏢 What about employees, offices, and other business stuff?

If the GP is just a shell company, where does all the “stuff” happen? Employees, office supplies, software, computers, etc. typically reside within the management company and are paid for by fees charged to the fund. Because the business of managing and making investments (and employing people) comes with an increased liability risk, the management company is usually a separate LLC that manages multiple funds. It’s the public face of the investment group.

And that’s it! While things can get more complicated in certain situations, these are the “basics” of what the GP is, who’s in, and why it’s done this way. Don’t forget to share this article with an emerging fund sponsor who might find it valuable.

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.