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What is a Limited Partnership?
99% of funds use the Limited Partnership model when framing a fund. But most people don't even know what that means!
A Limited Partnership (LP) has two other entities that interact with it. The General Partner (GP) and the Limited Partners (LP's).
Simply put, the general partner, often referred to as a fund manager, oversees the assets in the limited partnership, or "fund."
Simply put - the GP governs what happens in the LP.
Your typical financial adviser will tell you that they have a fiduciary responsibility to your money, which means that they have to act in your best interest.
General Partners, unlike financial advisers, do NOT have a fiduciary responsibility to your money.
Their sole purpose and stewardship is to make the fund more money.
Limited Partners, or different types of investors, invest into the Limited Partnership. They are limited in terms to the liability, meaning- they can only lose as much money as they put in.
Before investing, limited partners sign agreements stating that they are aware, agree with, and approve of your fund thesis & terms.
These documents are called the LPA (Limited Partnership Agreement) and PPM (Private Placement Memorandum). They are essentially the fund bible. Very important documents!
However, in the PPM - the GP outlines every possible reason as to why the investors might lose their money....
So once they sign the dotted line... the money is out of their hands.
How Does a LP Protect You?
I was recently talking to a friend that said to me,
"Bridger. Why do people set up their fund using a general partner and a limited partnership over other structures like an LLC or Corporation ?"
Such a great question!
Most of us use the LP/GP model due to one reason: protection.
Let's say you started a 10 million dollar fund. You have three limited partners who each invested in your fund.
Each one is aware of what you intend to do with their money and how you are going to make it grow.
Then one of your investors comes to you and says,
"Ya know what, I actually need that money... I didn't pay taxes (or some lame excuse). Plus, I don't completely agree with the way you're handling my money."
This might sound harsh, but that sucks for them! If the fund hasn't fulfilled the terms set forth in the documents yet, you are under no legal obligation to do anything they ask of you.
Investors can withdrawal their capital early. However, often outlined in the PPM and LPA, there are penalties to an early withdraw.
They can kick and scream all they want but those investors have already signed over their money!
As a fund manager, your first and foremost responsible is to the limited partnership itself, and not the investors.
You are completely protected against any legal charges as long as you strictly adhere to what is outline in your PPM and LPA documents.
That is the beauty of it. You define the terms. But if you do infringe against your offering, you then do become liable.
The LP/GP structure, allows you to grow the fund in a way that provides the highest rate of return for both yourself and your Limited Partners.
Pro tip: my mastermind program helps walk you through these documents and their meanings to save you time and money. If you haven't had a chance to watch my free 1-hour webinar, sign up here.
Thanks for the read!
