What role do limited partners (LPs) play in private equity?

Limited partners (LPs) play a crucial role in private equity by providing capital to the funds managed by general partners (GPs) while not taking an active role in the management of the investments. This structure allows LPs, such as institutional investors, pension funds, and high-net-worth individuals, to invest in private equity without needing to possess expertise in managing investments or making strategic decisions related to the portfolio companies.

LPs typically commit a substantial amount of capital to a fund at the outset and expect to receive returns over time as the fund realizes value from its investments. Their limited liability also protects them; they are not responsible for the day-to-day operations or strategic directions taken by the fund. Instead, they rely on the expertise of the GPs, who are tasked with sourcing, managing, and exiting investments.

This separation of roles is fundamental in the private equity model, as it allows specialized managers (the GPs) to focus on generating returns while LPs provide the necessary funding without involvement in operational matters. The nature of this relationship underscores the passive investment role of LPs in contrast to the active management role of GPs.