How Are Private Equity Firms Structured?
To understand how private equity firms are structured, it’s important to understand that the partners of a private equity firm comprise the “General Partner” (GP) of a fund. They obtain capital commitmentsfrom (typically) institutional investors known as Limited Partners (LPs). These institutional investors include pension and endowment funds, retirement funds, insurance companies, and high net worth individuals.
A single PE firm (if successful) will manage several funds (i.e., a family of funds) and generally try to raise a new fund every few years. They then use this capital to invest in or buy companies, which become portfolio companies.
The LPs generally just provide capital. They don’t have a hand in deciding on which companies to invest in. The GPs decide that. However, if the LPs are unimpressed with the returns generated by the GP, they may choose not to invest with the PE fund again.