General Partner (GP)
Definition - What does General Partner (GP) mean?
In the context of private equity (PE), the general partner, or GP, refers to the PE firm that manages a private equity fund. These funds are usually set up as general partnerships with the third party investors being the limited partners and the PE firm acting as the GP. In addition to raising the funds and administering the daily operations of the fund, the GP is responsible for identifying and closing on investments, assisting the company management teams in maximizing value, and liquidating investments so distributions can be made out of the partnership to the limited partners.
Divestopedia explains General Partner (GP)
General partners are aligned with the financial objectives of their investors or limited partners via their compensation arrangement. GPs are usually compensated using a "2 and 20" fee structure. The "2" refers to the annual management fee to cover overhead and salaries, while the "20" refers to the carried interest or bonus the GP gets after achieving returns in excess of the preferred return. It is this carry that the GP works very hard for.
For example, if the limited partners get a preferred return of 8% and the partnership delivers a 25% return, the GP would get 20% of the 17% incremental return delivered. For large funds, this carry can be very significant. However, limited partners ensure that GPs don't get more than the specified carry percentage by incorporating clawback provisions in the compensation agreements. Clawback provisions ensure that some carry is returned if some investments under-perform after carry has been paid during the life of the fund.
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