Fund structures: GPs, LPs, fees and carry

The two parties

The general partner, or GP, is the manager. It raises the fund, sources and executes investments, sits on boards, and eventually sells. The GP is the entity a business meets and negotiates with.

The limited partners, or LPs, supply the capital. They are typically pension funds, insurers, endowments, foundations, development finance institutions, sovereign funds and family offices. Their liability is limited to what they commit, and critically they have no say in individual investment decisions — that separation is what allows the fund to move at all.

The relationship is governed by a limited partnership agreement setting out what the fund may invest in, over what period, at what size, and on what terms the manager is paid. It is a contract the GP cannot simply set aside, which is the origin of the mandate constraints founders experience as arbitrary.

Commitments, drawdowns and the thing that surprises founders

LPs do not hand over cash when a fund closes. They make a commitment, and the GP calls that capital down in tranches as investments are made. A fund that has "raised" fifty million holds very little of it at any given moment.

Two consequences follow. Timelines lengthen, because a capital call takes real time between agreement and funds arriving. And a fund's ability to invest depends on its LPs honouring calls — which in stressed markets is not automatic, and is one reason funds hold back reserves rather than deploying everything into new companies.

Those reserves matter to a founder more than almost anything else in this lesson. A fund typically keeps a substantial portion of its capital for follow-on investment into existing portfolio companies. When a business asks why an investor who backed them will not lead the next round, the answer is often about reserve allocation rather than confidence.

The ten-year clock

A closed-end fund has a finite life, conventionally around ten years with possible extensions. Roughly the first five are the investment period, during which new companies are added; the remainder is for supporting and exiting them.

Where a fund sits in that cycle changes its behaviour completely. A fund in year two is hunting and can be patient. A fund in year eight needs exits, and will push for a sale on a timetable driven by its own structure rather than by the company's readiness. It is entirely reasonable, and quite revealing, to ask an investor which fund they are investing from and what vintage it is.

Fees and carried interest

Managers are paid two ways. A management fee, conventionally around 2% of committed capital annually, funds the firm's operations — salaries, diligence, legal costs. It is paid whether investments perform or not.

Carried interest, conventionally 20% of profits, is the manager's share of the upside. It is typically paid only after LPs have received their capital back plus a preferred return — a hurdle rate, often around 8% — so the manager earns carry only on genuine outperformance.

This is the source of the industry's most-discussed misalignment. Management fees reward raising a large fund; carry rewards investing it well. A firm managing a very large fund can be handsomely paid for mediocre performance, which is why sophisticated LPs scrutinise fee structures as closely as track records.

It also explains the cheque-size floor that shapes African markets. Assessing and monitoring an investment costs roughly the same whether the cheque is one million or ten, so a fund with a small team cannot afford many small transactions. The funding gap this creates is arithmetic, not indifference — the African capital stack traces where it bites.

Not everything comes through a fund

Fund structures dominate but they are not the only route, and the alternatives behave differently.

Direct investors — family offices, corporates, high-net-worth individuals — invest their own money. No ten-year clock, no LP reporting, and frequently far more patience about timing. The trade is that decisions can be slower and less predictable, because there is no committee obliged to reach one.

Co-investment allows an LP to invest alongside a fund directly into a company, usually on better fee terms. For the business this means an additional party at the table with its own view.

Evergreen or permanent capital vehicles have no fixed life and can hold indefinitely. Rare in African markets but growing, and materially better suited to businesses that compound steadily rather than sprinting to an exit. If a business does not want a sale forced by someone else's fund calendar, this is the structure worth seeking out.

What this means when you are raising

Three practical questions follow from the structure, and all three are entirely reasonable to ask.

Which fund is this coming from, and what vintage? That tells you whether the investor has time. What is the fund's typical cheque and remaining capacity? That tells you whether your raise fits before either side spends months finding out. And what does the mandate require — sector, geography, impact reporting? That tells you what conditions travel with the money.

Investors expect these questions from serious counterparties. Not asking them is more likely to be read as inexperience than as good manners.