It is usually composed of a group of experienced investors, of which GP (General Partner) and LP (Limited Partner) are two important participants.
1. The difference between GP and LP
1.Definition and role of GP:
GP (General Partner) is usually one or more management partners, who are the managers and decision-makers. GPs are usually professional investment institutions or individuals with rich investment experience and expertise. GP plays an important role in the day-to-day management and investment decisions. They need to conduct market research, project screening, portfolio construction, and more, as well as develop investment strategies and execution plans. GPs also need to communicate and negotiate with investors to gain their support and trust. GPs have higher authority and responsibility in the market and need to take greater responsibility for the risks and rewards of the market.
2.Definition and role of LP:
LP (Limited Partner) refers to the limited partners who invest in **, they provide funds to **, and share the profits of **. LPs are usually institutional investors or individuals who are more concerned with investment returns and risk control. The main role of LPs in the project is that of the funders, and they provide funds to the company so that they can carry out their investment activities. Compared with GPs, LPs have less authority and responsibility in day-to-day management and investment decisions, and mainly rely on GPs' professional capabilities and decision-making. LPs are more passively involved in the operation and performance of the company, and they profit from the return on investment.
3.Differences: In terms of distributing earnings, GPs typically receive management fees and performance-based compensation from **. Overhead is a percentage of the scale that covers the operating costs of the GP. Performance-based remuneration is based on the return on investment, usually based on the portion of the return above a certain rate of return. At the same time, LPs profit mainly through return on investment, and they share the remainder of the gains.
2. Analysis of priority and inferior rights and interests
1.Preferential Benefits:
Preferential equity refers to the equity of a particular investor to enjoy preferential distribution of returns upon exit or distribution of earnings. In general, GPs (General Partners) have priority benefits. This means that when exiting or distributing earnings, GP first receives a percentage of the return. Preferential equity can be determined by agreement, either in the form of a fixed percentage of the return or in accordance with a certain distribution mechanism.
2.Inferior Equity:
Inferior equity refers to the equity of the remaining investors to share a certain percentage of the residual return when they exit or distribute the income. Normally, LPs (Limited Partners) have inferior benefits. After the GP obtains the preferential interest, the remaining returns are distributed to the LP according to the agreed proportion. Inferior equity can provide greater potential for returns, but it also takes on higher risk.
3.Distribution Mechanism:
* The distribution mechanism is the key to determining the priority and inferior benefits. There are two common distribution mechanisms: waterfall and equal distribution.
Waterfall Mechanic: The waterfall mechanic distributes ** rewards in a certain order. First, investors with preferential interests (usually GPs) receive a portion of the return at an agreed rate until a certain level or percentage is reached. The remaining returns are then distributed in proportion to the investors (usually LPs) with inferior equity. This mechanism ensures that investors with preferential interests receive the return first, while investors with inferior interests share the remaining returns later.
Equal Distribution Mechanism: The Equal Distribution Mechanism distributes returns equally to all investors, regardless of preferential and inferior interests. Under this mechanism, all investors share in the same proportion of returns, regardless of their preferred or inferior interests. This mechanism can simplify the allocation process, but it may not align with the risk and return appetite among different investors.
Conclusion:
*Success depends on close cooperation and mutual trust between GPs and LPs. The GP is responsible for the operational and investment decisions, and the LP provides financial support and shares in the return on investment. When it comes to distributing returns, GPs usually have a preferential interest, while LPs have an inferior interest. This allocation mechanism is designed to motivate GPs to work hard for the long-term success of the best and to ensure that LPs can receive a reasonable return.