GP vs LP In Real Estate Syndications: What’s The Difference?

Large-scale commercial real estate investments require significant effort to identify, evaluate, finance, manage, and finally sell. These investments are usually made by two types of investors:

• one that handles all the tasks just mentioned
• another that provides most of the needed funds

The group that does the majority of the work is usually referred to as the managing member or the general partner (GP), while the group providing the capital is known as a member or limited partner (LP). Even though the actual names can depend on the legal framework of the investment entity, people in the industry often use the terms general partner and limited partner to describe these roles.

Both these types of investors hold an equity interest in a real estate investment, but they play very different roles. When a deal is being arranged, the GP and LPs form a joint venture (JV) agreement that outlines their rights, roles, and responsibilities and includes a “waterfall”, a system that defines how the cash flow and distributions from the investment will be shared between them at various levels of returns.

Investors need to understand the relationship between the GP and LPs before investing, to comprehend the potential benefits and risks for each side in the deal.

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General Partnerships vs Limited Partnerships

Main Differences

In a General Partnership (GP), all partners share equal rights and responsibilities, and each can sign contracts on behalf of the business. Decisions typically require unanimous or majority agreement between partners.

On the other hand, a Limited Partnership agreement (LP) has at least one general partner with unlimited liability and other partners (limited partners) with limited liability. The limited partners’ liability is limited to their investment in the partnership.

Responsibilities

The responsibilities of partners differ significantly between the two partnership types. In a general partnership, all partners are actively involved in the day-to-day management of the business and have equal decision-making authority.

In contrast, limited partnerships clearly distinguish between general and limited partners’ responsibilities. General partners manage the partnership’s daily operations and have decision-making authority, while limited partners primarily contribute capital and do not have management responsibilities.

Overall, the choice between a general partnership and a limited partnership depends on the partners’ desired level of involvement in the business, their risk tolerance, and their preferences for managing business responsibilities.

Roles and Responsibilities

General Partners

General partners (GP) play an active role in managing a partnership, making them integral to the business’s success. They are responsible for day-to-day operations and have the authority to make major decisions. GPs usually have an unlimited liability, meaning they are personally liable for any debts incurred by the partnership.

In a private equity context, fund managers are responsible for fundraising, which involves presenting the firm’s investment strategy and track record to potential investors and securing commitments from limited partners. They may also be involved in the selection, monitoring, and eventual exit of investments.

Limited Partners

Limited partners (LP), on the other hand, are more passive in their involvement with the partnership. They primarily act as investors and don’t take part in the day-to-day management and decision-making of the asset. As a result, they enjoy limited liability, which means their personal assets are protected from the partnership’s debts.

Their primary role is to provide the capital for real estate syndications and rely on the expertise of the general partners to make informed investment decisions on their behalf. This arrangement allows the LP investor to participate in the potential profits of the partnership without being directly involved in its operations.

This is the #1 reason I’ve invested in real estate syndications as a limited partner. I don’t have time to deal with tenants, but I still want to reap the benefits of passive income and real estate’s tax advantages. 

If you want to learn more about how I generate passive income from syndications, check out this video:

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3 Investment Types

Here are the 3 main investment types when it comes to a GP vs LP structure:

Investment Type	Description	Role of LPs	Role of GPs
Real Estate Syndications	Investors pool their capital to acquire and manage real estate properties.	Contribute capital with limited liability	Manage the investment deal and make crucial decisions
Private Equity Firms	These firms manage funds that invest in private companies focusing on operational improvements and strategic growth.	Provide capital for investments.	Responsible for sourcing, analyzing, executing investment opportunities, and managing portfolio companies
Other Real Estate Investments (REITs and Real Estate Investment Funds)	Alternatives to syndications and private equity firms, owning and managing income-producing real estate assets.	Invest to benefit from a share of the income generated by the properties	Responsible for the management and operation of the assets

Investment Process

Due Diligence

Due diligence is a crucial step undertaken by GPs before committing to an investment opportunity. It involves a thorough examination of potential investments, including financial, legal, and operational aspects. They’re responsible for conducting extensive research, analyzing potential risks, and ensuring that the investment aligns with the fund’s strategy and objectives.

Capital Calls and Distribution Waterfalls

Once an investment opportunity has been identified and due diligence completed, GPs issue capital calls to LPs. Capital calls are requests for LPs to contribute a portion of their committed capital to fund the investment. It’s essential for LPs to fulfill their capital call obligations promptly, as failure to do so can result in penalties and reduced returns.

After an investment has generated returns, a distribution waterfall comes into play. This mechanism defines how profits are distributed among LPs and GPs.

Typically, LPs receive their initial capital back, followed by a preferred return on their investment. Once these criteria are met, the remaining profits are split between the LPs and GPs according to an agreed-upon ratio, often including performance fees for the GPs if specific benchmarks are achieved.

Legal Structures and Liability

Unlimited Liability vs Limited Liability

In the world of business, there are various legal structures that organizations can adopt, and these structures may differ in terms of liability. Unlimited liability implies that the owners of the business, such as the partners in a general partnership, are completely responsible for the debts and obligations of the business. In this scenario, their personal assets may be seized to pay off the debts if the business is unable to do so.

On the other hand, a limited liability partnership protects the owners, ensuring that they are not personally responsible for the company’s debts. This structure is commonly associated with a limited liability company (LLC) and limited partnerships (LP).

An LLC combines a corporation’s limited liability aspect with a partnership’s operational flexibility. The owners, known as members, are not personally liable for the company’s debts or legal issues.

Related article: Does Forming an LLC Really Protect Personal Assets?

Limited Partnership (LP)

A limited partnership (LP) comprises two types of partners:

• general partners
• limited partners

General partners have unlimited liability, whereas limited partners enjoy limited liability. In this structure, limited partners are passive investors and do not participate in the management or control of the business.

Joint Ventures

A joint venture is a business arrangement where two or more entities agree to combine resources and expertise for a specific project or goal. Joint ventures can involve different legal structures, such as general partnerships, limited partnerships, LLCs, or corporations. The liability of the parties involved in a joint venture will depend on the chosen legal structure.

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Fees and Compensation

In private equity, fees and compensation are crucial in the dynamics between General Partners (GPs) and Limited Partners (LPs). 

Carried Interest

Carried interest, also known as the performance fee, is the share of profits allocated to the GP as a reward for successfully managing the fund’s investments. Typically, GPs receive around 20% of the profits from assets, while 80% are distributed among the LPs.

However, this is subject to a hurdle rate, which is the minimum required return on an investment before the GP starts receiving carried interest.

For example, if the hurdle rate is set at 8%, the GP will only be given carried interest when the fund generates a return higher than 8%.

Management Fees

In addition to carried interest, GPs receive annual management fees for the daily administration and operations of the private equity fund. These fees are typically calculated as a percentage of the capital committed by the LPs. The annual fee usually ranges from 1% to 2.5% and tends to decrease as the fund matures to reduce the investors’ overall cost burden.

Fund management fees cover salaries, office space, and other operational costs. Some funds may also include fees for transactions and monitoring, which the portfolio companies bear.

It is also important to mention the GP catch-up provisions, which come into effect after the hurdle rate has been met. These provisions allow GPs to receive a larger share of the profits temporarily until they have “caught up” to a predetermined proportion of profits.

Once the catch-up provisions have been satisfied, the profit-sharing ratio returns to the standard 80-20 split between LPs and GPs.

Trends and Developments

LP-led Transactions

In recent years, there has been a noticeable increase in LP-led transactions. This trend is characterized by limited partners (LPs) taking a more active role in managing their private equity investments, which historically have been managed by general partners (GPs).

LPs are gaining more control over their investments and seeking better alignment with their investment objectives. One key driver for this trend is the desire to manage risk and improve portfolio performance. LPs are also looking for opportunities to co-invest alongside GPs, which allows them to leverage their expertise in specific industries.

Some common structures for LP-led transactions include:

• direct investments
• co-investments
• fund recapitalization

Direct investments occur when LPs invest directly into portfolio companies without the involvement of a GP. Co-investments involve LPs investing alongside a GP in a specific deal. Fund recapitalizations occur when LPs acquire a portion of a fund’s existing assets, providing liquidity for other LPs who wish to exit.

GP-led Secondaries

Another major trend in the private equity landscape is the growth of GP-led secondary transactions, which have become a popular exit strategy for GPs. GP-led secondaries involve general partners selling a portion of their fund’s existing assets to a new set of investors, typically in the form of a new fund.

This allows them to provide liquidity to their LPs, while also giving them more time and capital to manage existing investments or pursue new opportunities.

Over the past few years, there has been a significant increase in the volume of GP-led secondary transactions, driven by the increasing maturity and diversity of the private equity ecosystem. Several factors have contributed to this trend, including the growing complexity of GP-led transactions, better alignment of interests between GPs and secondary investors, and improved pricing transparency in secondary markets.

GP-led secondaries can take various forms, such as:

• fund restructurings
• single-asset secondaries
• preferred equity solutions

Fund restructurings involve transferring the existing fund’s assets into a new vehicle, often accompanied by changes in terms and fees. Single-asset secondaries are transactions where a single portfolio company is carved out and sold to a new investor. Preferred equity solutions involve the issuance of preferred equity to a new investor, who acquires a priority position in the capital structure.

Frequently Asked Questions

What are the main differences between a general partner (GP) and limited partner (LP)?

General partners (GPs) have management authority and full responsibility for the partnership’s liabilities. They are actively involved in the operation of the business. Limited partners (LPs) have limited liability, which means their liability is only up to the amount they have invested in the partnership. They don’t participate in the business’s day-to-day operations and management decisions. 

How do GP and LP roles differ in private equity?

In private equity, GPs manage the fund, which includes sourcing, executing, and managing investments. They often charge management fees and carried interest to the LPs. On the other hand, LPs are passive investors who provide capital to the fund. They expect investment returns and are typically less involved in the decision-making process.

What are the responsibilities of a GP in a real estate partnership?

A GP in a real estate partnership is responsible for managing the partnership’s day-to-day operations, including property acquisition, financing, leasing, and property management. They also make necessary decisions regarding the partnership, such as when to buy or sell properties.

How does the ownership structure work in a GP/LP partnership?

Ownership is divided in a GP/LP partnership based on the partners’ contributions and agreed-upon percentages. GPs typically maintain a smaller ownership stake while managing the partnership, while LPs have a larger ownership stake without having an active role in management. 

Which investments are more suitable for LPs and GPs?

LPs are generally more suitable for passive investors looking for diversification and returns on their investments without being actively involved in the management of the business. GPs, on the other hand, are well-suited for active investors with the experience and expertise to manage the partnership and make strategic decisions to achieve the partnership’s goals.

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