Note on Private Equity Partnership Agreements

HENG ZHAO

Note on Private Equity Partnership Agreements

This case mainly introduced how two partnerships in private equity firms linked together. Limited partners are only responsible for the capital they invest. However general partners, the mangers of the fund, are responsible for the portfolio companies under the fund. Limited partners put several restrictions in agreements which include three parts: the overall management of the fund, the activities of the general partners, and the permissible types of investment.

In my opinion, the all provisions made by limited partners are to ensure their return and reduce the risk of the fund. As many private equity firms enlarge their fund scale and expand to multinational markets, limited partners will face more and more issues about how to eliminate some harmful activities by general partners, how to set a standard to control the allocation of investment, and how to gain the interest which general partners will work hard and carefully with the management of the portfolio companies.

My recommendation

According to the issues faced by limited partners in the case, I consider that: First, limited partners should put more restrictions on the activities such as selling general partners interests, borrowing recourses from fund to help another portfolio company, and reducing general partners contribution level to the fund. Second, the fund should reduce the allocation on some asset classes which have relatively high risk. In addition, they should increase carry fee as the compensation to the general partners and reduce the management fee in order to provide same interest, focusing on the performance and value growth in the portfolio companies.