FRM Part I · FRM Exam Part I · Fund Management
A private equity fund is structured as a limited partnership. Which statement best describes the roles of the general partner (GP) and limited partners (LPs)?
The general partner manages the fund and its investments and bears unlimited liability, while limited partners provide most of the capital as passive investors whose liability is limited to their committed capital. This structure keeps LPs from taking part in management.
- AThe GP manages investments and has unlimited liability, while LPs supply most of the capital and have liability limited to their commitmentCorrect
- BThe LPs manage portfolio companies day to day, while the GP supplies all of the capital
- CThe GP and LPs share management control equally and both have limited liability
- DThe LPs have unlimited liability for fund debts, while the GP is protected by limited liability
Explanation
In a limited partnership fund the GP makes investment decisions and bears unlimited liability, while LPs contribute most of the capital and are passive, with liability capped at their commitment. The option giving LPs day-to-day control reverses roles, since active LP management would jeopardize limited liability.
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