Limited partnership

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Hedge Fund

A hedge fund is usually set up as a limited partnership, with the investors as the limited partners, and the management firm as the general partner.

A hedge fund partnership may be limited to just a prescribed number of investors, who must possess adequate wealth, sufficient liquidity, and an acceptable degree of investment sophistication. 

Private Equity

Like hedge funds, private equity funds are typically structured as limited partnerships where outside investors are limited Partners and the private equity firm, which may manage a number of funds, is the general Partner. Most private equity firms charge both a management fee and an incentive fee. The management fees generally range from 1 to 3 percent, while the incentive fee is typically 20%.

What is unique to private equity is this notion of committed capital.  This is the amount that the LPs have agreed to provide to the private equity fund. The committed capital remains with the LPs until the private equity fund draws from it for investment opportunities that it has identified.   

Before the committed capital is fully drawn down, a process which typically takes 3 to 5 years, the management fee is based on committed capital, not invested capital. 

Synonyms:
Limited partner
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Alternative Meanings:
  • Limited partnership

    A limited partnership is a type of business structure where there are one or more general partners who manage the business and are personally responsible for its debts and obligations, and one or more limited partners who contribute capital to the business but are not involved in its management and are not personally responsible for its debts and obligations.

    One of the main advantages of a limited partnership is that it allows for the injection of capital into the business without exposing the limited partners to personal liability for the debts and obligations of the business. Limited partners are only liable for the amount of capital they have contributed to the business.

    However, there are also some disadvantages to a limited partnership. Limited partners do not have the same level of control over the business as general partners and cannot make management decisions. They also do not receive the same level of protection as shareholders in a corporation, as they can still be held personally liable if they actively participate in the management of the business or engage in fraudulent or illegal activities.

    Limited partnerships are typically suitable for businesses that need to raise capital and are willing to have one or more partners who are not involved in the day-to-day management of the business. Examples of limited partnerships include real estate development projects and venture capital funds.

    See also: Sole Proprietorship, General Partnership, Corporation

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