Alternatives Knowledge Base

GP and LP Roles

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descriptionExplains the roles, rights, and responsibilities of General Partners and Limited Partners, including decision rights, economic rights, conflict management, and why LP passivity matters.
tagsgp, lp, general-partner, limited-partner, roles

6 min read

GP and LP Roles

Overview

Alternative investment funds — particularly closed-ended limited partnerships — have two primary types of participant: the General Partner (GP) and Limited Partners (LPs). Their roles, rights, and responsibilities are fundamentally different and are designed to be complementary: the GP contributes expertise and decision-making; LPs contribute capital.

Caveat: All specific rights, responsibilities, and economic terms are governed by the LPA and any side letters. The descriptions below are general; specific funds may differ materially.

General Partner (GP): Decision Rights

The GP is the fund manager — the firm (or sometimes individual) responsible for running the fund. The GP holds full management control and is the only party authorised to make investment and operational decisions on behalf of the fund.

Core GP responsibilities:

  • Sourcing, evaluating, and executing investments within the strategy
  • Managing portfolio companies or assets throughout the holding period
  • Preparing valuations and investor reports
  • Executing exits and distributing proceeds per the waterfall
  • Managing conflicts of interest and disclosing them to the LPAC

GP economics (illustrative; fund-specific):

  • Management fee – An annual fee (percentage of committed or invested capital) to cover operational costs. The fee basis, rate, and any step-downs are set in the LPA. See Fee Calculations for how this is calculated.
  • Carried interest – The GP’s share of fund profits above the hurdle rate; typically structured as 20% of profits above an 8% preferred return, but this varies by fund. See Carried Interest.
  • GP commitment – The GP typically invests their own capital in the fund (a “GP commitment”) to demonstrate alignment of interest with LPs. The amount varies.

Caveat: Fee and carry percentages vary by fund type, vintage, strategy, and manager. The figures above are illustrative common structures — they are not universal norms.

GP liability: The GP has unlimited liability for the fund’s legal obligations. In practice, the GP entity is structured to limit individual partners’ exposure, but this is a legal and structural matter governed by the specific entity type.

Limited Partner (LP): Economic Rights and Limited Control

LPs are the investors — typically pension funds, sovereign wealth funds, endowments, insurance companies, family offices, and high-net-worth individuals.

LP obligations:

LP economic rights (subject to LPA):

  • Receive distributions per the waterfall once realisation proceeds are available
  • Receive investor reporting on fund performance and capital accounts
  • Receive the benefit of management fee offsets, preferred return, and other economic protections set in the LPA

LP governance rights (subject to LPA):

  • Vote on certain limited matters (fund extensions, removal of GP with cause)
  • Participate in LP Advisory Committee (LPAC) if selected
  • Consent to certain material fund changes

LP liability: Limited to their committed capital only, provided they do not participate in management decisions.

Why LPs Must Remain Passive

The limited liability protection that LPs receive is conditional on them not participating in the management of the fund. If an LP exercises control over day-to-day investment decisions, they risk being reclassified as a general partner in their jurisdiction, which could expose them to unlimited liability.

This is why:

  • LPs cannot instruct the GP on specific investment decisions
  • LPAC functions are advisory and consent-based, not managerial
  • LPs vote only on a narrow range of pre-defined matters (typically structural, not operational)

In practice, sophisticated LPs exercise influence through the LP negotiation process (LPA and side-letter terms), LPAC engagement, and the decision of whether to re-invest in the next fund — not through day-to-day operational involvement.

LPAC (LP Advisory Committee)

Most funds establish an LPAC consisting of significant LPs. The LPAC:

  • Reviews and approves GP conflicts of interest (e.g., GP investing in a company related to a portfolio company)
  • Provides consent on material fund changes (e.g., fund life extension, changes to investment policy)
  • May review valuation methodology
  • Receives notice of key events between regular reporting cycles

The LPAC is advisory and consent-based, not decision-making. The GP retains full management authority. LPAC membership is typically by invitation, and not all LPs participate.

Conflict Management

Conflicts of interest arise when the GP’s interests diverge from the fund’s interests. Common scenarios include:

  • GP managing multiple funds simultaneously and allocating an attractive deal to the newer fund
  • GP-related parties transacting with portfolio companies
  • GP considering whether to roll assets into a continuation vehicle (GP-led secondary)

The LPA typically requires the GP to disclose conflicts to the LPAC and obtain consent before proceeding. The quality of conflict management governance is a key factor in LP due diligence.

Side Letters and LP-Specific Terms

Large or strategic LPs often negotiate side letters — bilateral agreements with the GP that modify or supplement their LPA terms. Common provisions include lower fees, enhanced reporting, MFN rights, exclusions from certain investment types, or transfer rights. See Limited Partnerships for detail.

From an operations perspective, side letters create LP-specific obligations that must be tracked separately. A capital account statement, fee calculation, or distribution notice for an LP with a side letter may differ from the standard calculation for other LPs in the same fund.

Source Anchors

  • Invest Europe Professional Standards — professional conduct, conflict management, and accountability standards for GPs and their obligations to LPs
  • ILPA Principles — LP-focused principles on alignment of interest, key-person provisions, fee disclosure, and LPAC governance rights

Manual Review Notes

  • The management fee and carried interest percentages cited are described as illustrative and should not be presented as industry norms without qualification. Fee structures vary significantly by strategy (VC vs buyout vs credit), fund size, vintage, and manager.
  • GP unlimited liability is a legal concept that operates differently across jurisdictions and GP entity structures. The practical exposure of GP principals depends on how the GP entity is structured. This file does not constitute legal advice.
  • LPAC powers vary materially across funds. Some have significant consent rights that effectively constrain GP action; others are largely ceremonial. The description here is a general framework.
  • The “passive investor” concept and its link to limited liability protection is jurisdiction-specific. Different countries have different tests for when LP involvement crosses into active management. Legal counsel should be consulted for jurisdiction-specific guidance.

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