Private Equity 20 Lectures (3) GP and LP in Private Fund

Phase 3 GP and LP in private equity funds, detailed explanation of fund structure construction and distribution

In the previous lecture, we introduced what kind of people can invest in private equity funds, including three different levels of investors. The people are in place, the money is in place, and it will be invested in the fund soon. Before investing, we should at least understand what is going on in the fund before we can rest assured. In this issue, we will introduce in detail the internal structure of the fund layer by layer.

The first step is to have individuals who have the ability to manage funds, which is what we often call venture capitalists, or more generally speaking, we can call them Fund Managers.

In the second step, these fund managers usually form a small group to act as the company's GP as a whole. This knowledge point is starting to be a bit difficult, everyone should pay attention to it. GP is the general partner, and we will introduce the LP limited partner in a while. What do general partners and limited partners mean? A general partner is someone who has the ability to manage funds and can’t make enough money. A limited partner is someone who has money but no management skills, and can’t do anything with money. That is to say, GPs help LPs manage money, so GPs are likely to be involved in this process, which leads to different responsibilities of GPs and LPs. GPs have unlimited responsibilities for the fund, while LPs have limited responsibilities for the fund only with their own contributions. responsibility.

But be careful! If the GP is only one or a few individuals and does not form an LLC, then it is truly unlimited liability, and no one is willing to take such a risk. Therefore, in fact, several fund managers usually set up an LLC together, and the shell of such an LLC is put on the outside, which essentially turns unlimited liability into limited liability. Of course, understand that this does not mean that fund managers can do whatever they want. The limited liability system of the company has certain prerequisites. If the behavior is serious to a certain extent, pierce the corporate veil (piercing the corporate veil) can also be held to the individual. LPs are all rich bigwigs, and they are not vegetarians. If LPs find out that this GP is using our money to do other things, then sue the SEC (US Securities Regulatory Commission), and you will be considered an investment fraud. It is not impossible to be sentenced for decades and have the license revoked for life.

The third step is to set up the fund. The fund will be called XXX Fund, LP. Today we come to the most difficult point of knowledge. Don't confuse this place. This LP is not that LP. I know this thing is very difficult to understand, let's further explain with the following picture.

The fourth step, LP limited partners join. Here we will explain the concept of the two LPs, and it will be easier for everyone to understand. The yellow part of the LP in the middle refers to the fund itself, and the LP after the comma is just a suffix indicating its corporate nature, meaning Limited Partnership. In addition, the blue part is what we usually call LP, Limited Partner.

That is, the LP of the fund itself is called LP because of its company type and nature, but its role in the entire structure is a Fund fund. But the LP mentioned later is the investor who pays real money, and these people who pay are the limited partners of the LP in the fund structure.

It should also be noted here that these LPs can be individuals or companies. If several well-connected individual investors form a company, what we see will be an LLC, which in turn is their LPs The suffix of the company is similar to that of the previous GPs who formed an LLC. If you don't understand this place, please look back at the previous content and experience it for yourself.

Finally, in fact, the same group of fund managers often set up many GP teams to manage many funds. That's why we often hear people say the first fund, the second fund, the third fund or something.

Because the PPT space is relatively limited, I can only draw the LP below, and the latter picture does not even have a place to draw the LP. In addition, I also drew a picture that looks relatively small, but the relationship is relatively clear, here. In the process of explaining this diagram, I will also tell you about the common names of these structures in the fund.

The red circle on the left is what we call the general partner. The nature of this company is LLC. Its role in the entire fund is GP, usually composed of two or three fund managers. In the name, it is usually called XXX GP, LLC, and numbers may be added in the middle. For example, ABC Capital III GP, LLC is the third management company of their fund manager team, because in order to isolate risks, each fund manager manages A fund will set up a separate company, and they are named and numbered for their own convenience.

The light yellow piles on the right are all LPs, including these individual LPs, as well as LPs in the form of LLCs formed by a partnership of several investors. The name of the LP formed by several investors to form an LLC is usually called XXX Fund, LLC, and a number may be added in the middle, which is for the purpose of numbering within these investors. But this Fund is not another Fund, this is just that their reputation sounds good, the real fund is the blue part below.

The XXX Fund in the blue part below, LP is the real fund. The suffix LP indicates that the company is an LP limited partnership, and its role in the entire fund is the fund itself. The example we gave here, Bamboo Fund III, LP, is also a common nomenclature.

Then the green cloud at the bottom is the portfolio, which is directly translated as the securities investment portfolio. To put it bluntly, it is actually the project companies invested by the fund. Here we just give an example of Panda Technology, Inc. Panda Technology, but in real life, a fund usually invests in dozens of such project companies.

Well, the structure of the fund has been figured out, and the next step is to put the money into it. How does the money go in the fund? What are the stages in the life cycle of a fund? We will introduce you to the next video~

Here are 20 lectures of private equity funds, a required legal course for investors in Silicon Valley. I'm Liu Xiaoxiao, an American lawyer. See you next time.