PRIVATE EQUITY FUNDS (DISTRIBUTION OF RETURNS IN GENERAL PARTNER AND LIMITED PARTNERS)

The terms General Partner and Limited Partner are generic to PE world, and represent the way the stakeholders and their rights are structured within the PE. The PE fund is structured as a liability partnership; and General Partner (GP) is the one who represents the PE firm in terms of raising the capital from a basket of pension funds, angel investors, HNIs (high- net worth individuals), and the Limited Partners (LPs) are these investors (pension funds, angel investors etc) who have invested with the GP. The GP acts like the investment / fund manager and will formulate the investment portfolios 

(the enterprises where the PE will invest funds), and also determine the ‘capital commitment’ by the LPs. 

For e.g.: A PE looking to fund an enterprise into e-retailing (portfolio) will have its GP approaching its pool of LPs and, say, if a couple of LPs agree to investing the sum required, then this becomes the capital committed from the LPs end. One practical scenario will be that the investments are not required in one go – it will be in tranches –and hence there will be ‘calls’ raised by the GP for fund requests from the designated LPs (two in our case). Suppose if one of them doesn’t honor the call, the GP normally has the right to forfeit the amount invested by the LP to that point of time, unless the agreement specifically states otherwise, or allows for a ‘replacement’ by another LP who would purchase at a discount the existing share. The GP will usually stand to earn through ‘management fee’ which will be a 

% fixed on the deal amount and through ‘incentive fees’ – called hurdle rates. 

Conclusion 

We have seen that venture capital funds and PEs fill in the capital requirement gap of new emerging technologies and innovations. In matured markets like US, PEs does play a significant role in funding such segments. In India, VCs and PEs are still in evolving stages though e-commerce companies have certainly progressed due to their innovative entry and exit strategies. VCs work towards short and medium term goals, whereas PE funds stay put for the long run. However, both have well defined exit strategies, typically through acquisitions or IPO mode. In India, they come within the ambit of SEBI and have to follow the established rules and procedures for equity sourcing and funding.