What Is a Limited Partnership in Private Equity?

Estimated read time 3 min read

Have you heard of limited partnerships? Limited partnerships are commonly used in private equity financing. If you have a privately traded company — meaning it’s not listed on the stock exchange or otherwise open for public investments — you may want to use it to finance your operations. By understanding what a limited partnership is and how it works, you can decide whether it’s the right financing vehicle for your business.

What Is a Limited Partnership in Business Financing?

The Basics of a Limited Partnership

A limited partnership is a type of private equity investment with a fixed life. Some limited partnerships last five years, whereas others last 10 years. Regardless, they all have a fixed life, which is why they are known as “limited partnerships.”

Most private equity funds leverage limited partnerships when investing in publically traded companies. Private equity funds raise funds money from high-net-worth individuals and institutional investors. Using this money, they acquire publically traded companies through investments with the goal of improving their operations and ultimately achieving a profitable exit. A limited partnership is a type of financing vehicle that private equity funds use to facilitate these investments.

How a Limited Partnership Works

During a limited partnership, the private equity fund’s general partner will make investment decisions. The general partner will decide what publically traded companies to invest in and how much money to invest in them. They will also monitor the investments and, when the time is right, exit the investments. Exiting an investment typically involves selling the private equity fund’s ownership stake.

General Partners vs Limited Partners

A limited partnership typically has a general partner and limited partners. The general partner is the person who runs and oversees the fund’s investments. Limited partners, in comparison, are the high-net-worth individuals and institutional investors who invest in the private equity fund itself.

General partners are typically active investors, whereas limited partners are passive investors. They are considered passive investors because they don’t have any responsibilities; limited partners simply invest their money in a private equity fund.

What Are the Benefits of a Limited Partnership?

You can use a limited partnership to finance your business without taking on new debt. As a form of private equity financing, it doesn’t involve debt. Limited partnerships and other forms of private equity financing involve the sale of ownership to an investor. With a limited partnership, you can sell an ownership stake in your business to an investment group.

The general partner of a private equity fund may provide you with tools and resources that help your business grow. After all, general partners want the businesses in which they invest to succeed. If your business succeeds, the general partner’s shares will become more valuable.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.

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