A GP raises a 10-year locked-up fund, deploys it across 8 to 15 portfolio companies, and must return more than LPs gave up by abandoning public-market liquidity. Every term in the LPA exists to align that incentive.
The general partner is the active manager of the fund. Limited partners contribute capital and receive returns but have no operational role and no day-to-day authority. The GP's mandate spans the full life of the investment.
Capital formation and fund administration. The GP raises commitments, executes the LPA, calls capital from LPs as deals close (typically 10 to 14 days notice), maintains fund accounting and audited financials, files tax forms (Schedule K-1 in the US), and reports quarterly NAVs.
Sourcing and origination. The GP builds proprietary deal flow through industry relationships, intermediaries, sector specialization, and management referrals. Top funds see 200 to 500 deals per year per investment professional and close fewer than 2%.
Due diligence and execution. The GP runs commercial, financial, legal, tax, operational, and ESG diligence, structures the transaction (debt, equity, preferred), and negotiates the purchase agreement.
Common mistakes
- Confusing European and American waterfalls. European pays GP carry only after the entire fund returns capital plus preferred return. American pays carry deal-by-deal with clawback protection. Trap: candidates who say "American waterfall is safer for LPs" reverse the answer. American is GP-friendly. European is LP-friendly.
- Ignoring the catch-up provision. The catch-up is not extra carry, it restores the agreed 80/20 profit split after LPs receive their 8% pref. Trap: candidates who calculate carry as 20% of (total profit minus pref) understate GP carry by the catch-up amount.
- Reporting unrealized IRR as if it were realized. A fund with 25% IRR and 0.5x DPI has not actually returned capital. The IRR rests on NAV marks. Trap: questions that pair "high IRR" with "low DPI" expect you to flag the result as appraisal-driven, not cash-driven.
Bottom line
- GP runs sourcing, due diligence, structuring, value creation, and exits across a 10 to 12 year fund life; LPs are passive and locked in.
- Standard fees: 2% management on committed during the investment period (then on invested), 20% carry above an 8% preferred return, 1 to 5% GP commit; the catch-up restores the 80/20 split after pref.
- European waterfall (whole-fund) is LP-friendly; American (deal-by-deal) is GP-friendly and requires a clawback against early-deal overpayment.
- TVPI = DPI + RVPI (realized cash plus unrealized NAV). Top-quartile buyout TVPI is roughly 2.0x. IRR flatters early distributions and misleads during the J-curve.
Exam shortcut
For waterfall problems, follow the four-step order every time: (1) return of capital, (2) preferred return to LPs, (3) GP catch-up, (4) 80/20 split on residual. Skipping the catch-up step is the most common error. Always reconcile total distributions against the pool to confirm. For value creation bridges, write the three legs down on scratch and compute each: ΔEBITDA × exit multiple, entry EBITDA × Δmultiple, and change in debt.
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