Getting the Most out of the General Partner – Limited Partner Relationship

When it comes to private equity real estate investing and other forms of private investments, the relationship between the general partner (GP) and limited partners (LPs) is critical. This relationship is built on trust. Why? Because when you invest your money in private opportunities, you need to have confidence that the other party will fulfill its responsibilities in order for those assets to generate returns.

That’s why, before deciding where to invest your money, it’s important to understand how the GP-LP partnership works and how to leverage it to your advantage. Here’s what you need to know.

 

The GP – LP Partnership

The GP – LP relationship is a partnership between two or more parties who are looking to create value from an opportunity. You could compare it to the relationship between the general manager of a baseball club and the club’s investors.

In baseball, the general manager builds an infrastructure for scouts to find the right talent and seal winning deals. Similarly, in private equity real estate investing, the GP is responsible for setting up an infrastructure of experts and contacts that enables it to sift through and evaluate hundreds of opportunities. Once it has found a promising opportunity, it has to perform due diligence to make sure it’s worthwhile and has an appropriate risk-reward profile.

The next step is to take the opportunity to the market to find LPs who are willing to invest in it — like investors in a baseball club. LPs are responsible for performing their own assessment and ensuring that they come through on any pledges they make. In short, the GP performs the legwork up front and as a result assumes a lot of risk. The LPs’ risk is limited to the height of their investments.

The GP negotiates the deal to acquire the asset, and after its acquisition, assumes the responsibility for managing it so it achieves maximum performance and generates the best possible returns.

In terms of finances, the GP receives repayment for the due diligence and a fee for the acquisition. It also receives an asset management fee that’s usually between one and two percent. Then, once the LPs have received their preferred return, the GP receives a performance fee or carry. The remaining profits are subsequently split according to the specifics of the deal.

 

What to Expect From a Winning GP

Clearly, the performance of any asset hinges on the GP’s ability to accurately assess opportunities, find the right LPs, strike a good deal and nurture the asset to achieve maximum performance. At Marcus Investments, we’ve been doing this for 85 years. During this time, mutual trust and respect have underpinned every single one of our partnerships. And since our crowdsourcing platform provides LPs with everything they need to maximize their investments in a passive manner, it only serves to further enable this ethos.

As an LP, you’ll receive quarterly communication, as well as announcements surrounding any significant events pertaining to your investment. You’ll also have access to tax paperwork and all relevant documents; plus, you’ll receive a thoughtful response to any questions or concerns you might express. Finally, with our legacy of winning, you can always expect your assets to perform.

 

Finding the Right GP

Babe Ruth once said, “Yesterday’s home runs don’t win today’s games.” And in today’s rapidly changing market, you’re best advised to look for a GP that doesn’t rest on its laurels but instead combines in-depth knowledge of investing with the cutting edge of technological developments. By doing this, you’ll have access to the expertise and tools you need to get the most out of the GP – LP relationship for years to come.

 

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