Institute of Equity.

GP / LP Fund Structures

The legal and mechanical structure of a Private Equity fund, detailing capital calls, commitments, and the standard 10-year lifecycle.

General Partners (GPs) and Limited Partners (LPs)

A private equity fund is typically structured as a Limited Partnership. This separates the management of the fund from the providers of capital.

General Partner (GP): The private equity firm itself (e.g., Blackstone, KKR). The GP manages the fund, sources deals, executes transactions, and dictates operational improvements. They have unlimited liability but only contribute a small percentage of the total fund capital (usually 1% to 5%).

Limited Partners (LPs): Institutional investors (pension funds, endowments, sovereign wealth funds) and high-net-worth individuals. They provide the vast majority of the capital (95% to 99%) but have limited liability and no day-to-day control over investment decisions.

Capital Commitments and Drawdowns

LPs do not hand over their money to the GP on day one. Instead, they make a Capital Commitment. This is a legally binding agreement to provide cash when the GP requests it to fund an investment or pay management fees.

When the GP finds a deal, they issue a Capital Call (or Drawdown Notice). LPs usually have 10 to 14 days to wire the requested funds.

Why this matters: The fund's Internal Rate of Return (IRR) is calculated based on when the cash is actually drawn down, not when it was committed. If a GP draws capital late in the fund's life and returns it quickly, it artificially boosts the IRR.

The 10-Year Lifecycle

Most PE funds have a standard 10-year lifespan, broken into distinct phases:

  1. Investment Period (Years 1-5): The GP is actively sourcing deals and calling capital to make new investments. Once this period ends, capital can usually only be called for follow-on investments in existing portfolio companies or to pay fees.
  2. Harvesting Period (Years 6-10): The GP focuses on improving the portfolio companies and seeking exit opportunities (sale to a strategic buyer, another PE firm, or an IPO) to return capital to LPs.
  3. Extensions: Most Limited Partnership Agreements (LPAs) allow for two 1-year extensions, often requiring LP consent, if more time is needed to exit remaining assets in a favorable market environment.