Why does LPs and GPs (Limited Partners and General Partners) matter?
A partner's money is not their own, and understanding whose it actually is explains a lot of investor behavior that otherwise looks arbitrary. LPs, pension funds, university endowments, family offices, and funds of funds, commit capital to a GP for a fixed term, usually around a decade, expecting a strong return at the end of it. GPs earn a small management fee to run the firm day to day, but their real incentive is carry, typically a share of the fund's profit, which is what actually aligns a GP with getting an investment right rather than merely deploying capital. A partner who passes on a company is protecting a decision they will have to defend to the people who trusted them with a fixed, finite pool.
What does LPs and GPs (Limited Partners and General Partners) look like in practice?
A $200 million fund raised from a mix of pension funds and family offices commits that capital for roughly ten years. The two General Partners running the fund earn a 2% annual management fee, about $4 million a year, to cover salaries and operations, and stand to earn 20% of whatever profit the fund returns above what LPs put in. If the fund returns $600 million against $200 million invested, the GPs' carry on that $400 million of profit is worth far more than a decade of management fees, which is exactly why a GP's real attention goes to which companies can plausibly drive that outcome.
What are the common mistakes with LPs and GPs (Limited Partners and General Partners)?
- Assuming a partner's personal money is on the line the way a bank's own capital is, when it is LP capital the GP is stewarding under a fiduciary obligation.
- Reading every pass as a judgment on the business, when it is sometimes a judgment about what this particular GP can defend to their own LPs given the fund's stage and mandate.
- Not asking a fund about its own fundraising cycle and how much of its current fund is already deployed, both of which shape how eager and how fast that GP can move.
- Confusing management fee with carry, and missing that carry, not the fee, is what actually motivates a GP's investment decisions.
Related concepts
- Lead Investor and the Term SheetThe lead investor is the firm that sets the terms of a round and typically writes its largest check; the term sheet is the document in which they propose those terms before legal work begins.
- Pre-Seed, Seed, and Series AThe named stages of early venture financing, distinguished not by dollar amount but by what the company has proven and what the round is meant to buy.