Thinking of starting your own fund and wondering how managing a fund works? When speaking to lawyers, tax counsels and advisors, the legal language of funds can make you question your grasp of English. There’s a lot of new vocabulary to get familiar with when learning —like LPs, GPs, LPAs, limited partnerships, and VCCs.
Complicated? Definitely. Impossible to understand? Definitely not. Taking a little time to get familiar with these terms—and the legal structures they describe—will give you insight into how to set up your fund. Specifically, we would like to go through the two most common fund structures we see in APAC and the Middle East today: Limited Partnership and Variable Capital Company (VCC).
Limited Partnership
The core structure of most venture capital and private equity funds is a limited partnership. A limited partnership is made up of at least one general partner (GP) and at least one limited partner (LP) who do business together.
The GPs and LPs of a limited partnership can be individual people or legal entities.
General partner (GP)
Typically, the GP of a venture capital or private equity fund is a legal entity established and run by people employed by the fund manager firm. In any limited partnership, the GP manages the partnership.
As a result, the GP has unlimited liability for the partnership’s business operations. In other words, the GP assumes full responsibility for any business debts or legal liabilities.
Limited partner (LP)
With a venture capital or private equity fund, a limited partner is the investor who supplies the capital. These LPs can be individuals or legal entities. Often, LPs consist of institutional investors, such as pension funds, college endowments, trusts, insurance companies, health care systems, family offices, sovereign wealth funds as well as high net-worth individuals. Sometimes, venture capital or private equity firms also make investments into other funds as LPs.
LPs have limited liability in the partnership because they don’t take part in directing its business operations and remain passive investors. When a limited partnership has debts or legal liabilities, the amount that LPs are responsible for is typically limited to their investment amounts in the partnership, and does not extend to their assets outside the partnership. (The GP, on the other hand, would be on the hook for the full amount.)
GP vs. LP
| GP | LP | |
| Role | Manages partnership | Supplies capital |
| Liability | Unlimited | Limited |
The limited partnership agreement (LPA)
A limited partnership agreement (LPA) spells out what GPs and LPs can and can’t do in a limited partnership.
This agreement includes rules for things like:
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How someone becomes or is removed as a partner
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What rights each partner has
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What the scope of their activities may be
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How investors make contributions to the partnership
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How the partnership will distribute investment proceeds
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How votes will be conducted
Partnership interests
The LPA also specifies partnership interests, which is the amount of the partnership each GP and LP owns. This percentage is usually relative to each partner’s contribution to the partnership.
Amended and restated LPA
An existing LPA can be modified by passing an amendment that adds, deletes, or modifies its terms. The partnership is then governed by the amended LPA. Partners can also discard the whole LPA (and any amendments to it) by replacing it with an entirely new agreement known as an amended and restated LPA. As of the date it’s enacted, the entity is then governed only by the amended and restated LPA (which is known as the A&R LPA).
Variable Capital Company (VCC)
In 2020, Singapore introduced the Variable Capital Company (“VCC”), a new legal structure for investment funds, which has been widely used by both venture capital and private equity funds in the region.
The VCC legislation is administered by the Accounting and Corporate Regulatory Authority of Singapore (ACRA), and all VCCs must be managed by a regulated fund manager in Singapore. The anti-money laundering and anti-terrorism obligations of VCCs will come under the purview of the Monetary Authority of Singapore (MAS).
Fund managers would consider setting up VCCs due to the flexible nature of issuing and redeeming shares as well as to pay dividends. Another factor is the cost efficiencies that the fund managers would enjoy—a VCC can be set up as a single standalone fund or an umbrella fund with two or more sub-funds, each holding a portfolio of segregated assets and liabilities.
Setting up your fund with Carta
There are many ways to start a fund management firm and set up a fund. You might need to add even more layers of structure to accommodate regulatory rules, different types of investors (like tax-exempt investors), or entities formed in different jurisdictions, among other factors.
Carta can guide you through designing a fund structure that makes sense for you. We work with seasoned and established business partners to help managers form entities, understand key concepts in their entity documents, open bank accounts and obtain tax identification numbers for FATCA/CRS.
By making sure your legal fund structure is set up to facilitate your investment goals, you can set your fund up for long-term success.
