Private Equity Fund Structure*
Regulatory changes in the United States in the late 1970s permitted greater private equity (PE) investment by pension funds, but it was mainly the intermediation through limited partnerships that fostered the widespread adoption of private equity in institutional portfolios. According to Prowse (1998), the growth of private equity shows how organizational innovation, assisted by regulatory and tax changes, can create new possibilities and ignite activity in a particular market. The limited partnership as the dominant structure in private equity investment results from the extreme information asymmetries and incentive problems that arise in the private equity market. While the limited partnership structure does not exist in all jurisdictions, most local legislation allows for this well-established form to be used. This explains why in PE funds managers are commonly called general partners (GPs) and investors are called limited partners (LPs). These terms are used interchangeably in the PE chapters of this book.
For the private equity fund, the limited partnership agreement (LPA) defines its legal framework and its terms and conditions. The LPA has two main categories of clauses: (1) investor protection clauses and (2) economic terms clauses. Investor protection clauses cover investment strategy, including possible investment restrictions, key-person provisions, termination and divorce, the investment committee, the LP advisory committee, ...