Limited Partnership

A limited partnership (LP) is the legal structure used to organize most private equity, venture capital, hedge, and real estate funds. The structure creates two classes of partners: the general partner (GP), who manages the fund and makes all investment decisions with unlimited liability; and limited partners (LPs), who contribute capital and whose liability is limited to their committed investment.

Allocator Relevance: Understanding LP rights — consent thresholds, LPAC seats, removal provisions, key-person clauses, and audit rights — is the foundation of LP governance due diligence. The LP Agreement (LPA) defines the economic and legal relationship between investor and manager for the fund's entire life.

Legal Structure

Private funds are organized as limited partnerships (most commonly in Delaware) or equivalent structures in other jurisdictions (Cayman Islands exempted limited partnerships, Luxembourg SCSps, etc.). The fund files a certificate of limited partnership, and all economic and governance terms are codified in the Limited Partnership Agreement (LPA). The GP typically creates a separate management company and GP entity for each fund vehicle.

Key Provisions in the LPA

• Capital commitment and drawdown — total LP commitment amount; how and when capital is called (capital calls); recycling provisions
• Investment period — typically 5 years; GP's authority to call capital and make new investments ceases at the end
• Fund life — total duration (typically 10 years) with optional 1–2 year extensions requiring LP consent
• Management fees — calculation base (committed vs. invested capital) and rate; reduction schedule in harvest period
• Carried interest — percentage, hurdle rate, catch-up provision, and clawback mechanism
• LPAC — Limited Partner Advisory Committee; consent rights over conflicts of interest, valuation, and key-person events
• Key-person clause — triggers fund suspension of investment activity if named principals leave or are unavailable
• Removal and no-fault divorce — provisions allowing LPs to remove the GP or terminate the fund (supermajority vote typically required)

Governance Rights

LPs in standard funds have limited day-to-day rights — they cannot participate in management or they lose limited liability status. However, they hold meaningful protective rights: consent over material amendments, LPAC representation, quarterly reports and audited financials, and the ability to trigger key-person clauses. Negotiating these provisions is a primary institutional LP function.

Common Misconceptions

• LPs do not 'invest in companies' — they invest in a fund vehicle that holds company interests; LPs are one step removed from the underlying portfolio
• Limited liability is not absolute — LP status can be lost if LPs participate in fund management; this is why LPs have advisory roles, not management roles
• The LPA is not standard — material terms vary significantly between managers, vintages, and negotiating LPs; comparison of LPAs is a core institutional LP skill

Key Takeaways

• The limited partnership structure separates management (GP) from capital provision (LP) while limiting LP liability to committed capital
• The LPA governs every economic and governance aspect of the LP-GP relationship for the fund's full life — negotiation leverage is highest pre-commitment
• LPAC seats and consent rights are the primary LP governance tools; their scope and trigger thresholds define real LP protection