Understanding the Structure of a Private Equity Fund

Private equity investments often become significant marital assets in high-net-worth divorce cases. Before assigning value to these interests, it is essential to understand how private equity funds are organized and how profits flow through the structure.

Most private equity funds are established as limited partnerships. Within this structure, two primary groups exist: the General Partner (GP) and the Limited Partners (LPs).

The General Partner manages the fund, oversees investment decisions, and assumes responsibility for operations. Limited Partners provide the majority of the investment capital but generally do not participate in day-to-day management.

The Role of the General Partner

The GP typically contributes a small percentage of the fund’s capital while maintaining control over investment strategy. In many cases, the GP also owns and controls a separate management company that performs operational oversight of portfolio companies.

This management company is often staffed by experienced investment professionals who:

• Evaluate investment opportunities
• Manage portfolio companies
• Determine quarterly fair values
• Report performance to investors

Because the GP controls both management activities and investment decisions, its ownership interests can become highly valuable over time.

How Private Equity Managers Earn Income

Private equity managers generally receive compensation from two primary sources:

Management Fees

Funds commonly pay annual management fees of approximately 2% of committed capital during the early years of the fund’s life. Later, fees are often based on assets under management.

Carried Interest

Carried interest represents a share of the profits generated by the fund. After investors receive a minimum return—often called the hurdle rate—the GP may receive approximately 20% of remaining profits.
Historically, successful private equity funds have generated returns that significantly exceed hurdle rates, making carried interest one of the most valuable economic benefits associated with GP ownership.

Why Fund Structure Matters in Divorce

In divorce litigation, understanding the relationship between the fund, the GP, and the management company is critical. Each component may possess independent economic value and require separate analysis for equitable distribution purposes.

Proper valuation begins with understanding exactly what ownership interests exist and how they generate income.

Are you a family law attorney and need support for your client? Our team may be able to help. Call us at 704-376-3399.

This blog is part of a larger article that appeared in NACVA Quick Read Buzz You can read the full article here.