The anatomy of a modern fund structure

Authors:
Rita Astoor, Josephine Koh

|
Read time:
11 minutes
Published date:
December 3, 2025

Learn about fund structures for private investment funds, including the key entities, the flow of economics, and the legal agreements that govern them.

What is a private fund structure?

A private investment fund structure is the legal and financial framework that allows a group of investors to pool their capital to invest in private assets, such as startups or private companies. Think of it as the blueprint for how a fund is built and operated. This blueprint defines the roles of everyone involved, how money flows, and how decisions are made.

While there are various models, the most common structure for venture capital (VC) and private equity (PE) is the limited partnership. This structure is designed to align the interests of the fund managers and investors while providing important legal and tax advantages. It creates a clear system where active managers can make investment decisions while passive investors provide the necessary capital with limited risk.

The relationships between the different entities in a fund can be complex. A typical structure involves a general partner (GP) who manages the fund, a management company that handles operations, the fund itself which holds the investments, the limited partners (LPs) who provide the capital, and the portfolio companies (portcos) that receive the investment.

The components of a private fund

A fund is not a single company but a collection of separate legal entities working together, each with a specific purpose. This separation is intentional and serves to protect the different parties involved in these fund structures. Understanding the role of each player is essential to understanding the overall company structure.

The general partner

The general partner (GP) entity is the primary decision-maker of the fund. This is the entity that manages deal flow, performs due diligence, and ultimately decides which companies the fund will invest in. The GP is responsible for the overall fund strategy and investment thesis, fund performance, and managing the fund's operations from start to finish.

While it's called a "general partner," this entity is usually a limited liability company (LLC). This structure is important because it protects the individual fund managers from being personally liable for the fund's debts and obligations. This means if the fund faces legal issues, the personal assets of the fund managers are not at risk.

The management company

The management company is the operating business that employs the investment professionals and staff. It is responsible for paying all the firm's day-to-day expenses, such as employee salaries, office rent, and software subscriptions. Essentially, it's the business that runs the fund.

This entity is kept separate from the fund for a critical reason. This legal separation isolates the firm's operational liabilities, like an office lease or employee lawsuits, from the fund's investment assets. This structure protects the capital invested by the LPs from any legal or financial trouble the management company might face. If the management company were to be sued, the fund's investments in portcos would remain safe.

The fund

The private fund itself is the core investment vehicle, legally formed as a limited partnership. This is the entity that holds the capital commitments from investors and officially owns the equity in the portcos, which is tracked on a cap table. The term "venture capital or private equity fund" typically refers to this limited partnership.

Because these are private investments, the fund operates under specific securities laws. For this reason, participation is typically limited to certain types of sophisticated investors, such as accredited investors or qualified purchasers, who meet specific wealth or income thresholds under exemptions like 3(c)(1) and 3(c)(7). This is because various private market regulations assume these investors can better understand and bear the risks of private market investing.

The limited partners

The limited partners (LPs) are the investors who contribute the vast majority of the capital to a fund, typically providing more than 98% of the total. The GP's own investment is usually a much smaller fraction; the median GP commit is just 1.2% for funds under $1 million and as low as 0.39% for funds over $50 million. These investors can come from a variety of backgrounds and are the financial backbone of any private fund. Often, LPs are institutional investors, such as pension funds, college endowments, trusts, insurance companies, health care systems, family offices, and sovereign wealth funds. Sometimes, firms also make investments into outside funds as LPs, called a fund of funds (FoF).

Common examples of LPs include:

• University endowments
• Pension funds
• Insurance companies
• Family offices
• High-net-worth individuals

The most important aspect of the LP role is that it is passive. LPs provide the capital but do not participate in managing the fund or choosing investments. Their liability is limited to the amount of money they committed to the fund, which is a key protection in the GP LP fund structure. This means if the fund's investments fail, an LP cannot lose more than their original investment.

The portfolio companies

Portcos are the private companies that the fund invests in. The fund's equity interest in these companies is the primary asset that will hopefully generate returns for the LPs.

Why the limited partnership model is standard

The core component of most private investment funds is a limited partnership, which is the most common structure for PE or VC funds in the U.S. Now that we've identified the key players, let's explore why the limited partnership has become the industry standard. This structure is popular because it effectively balances the needs of both fund managers and investors, a fact underscored by how LPs allocate capital: In 2024, established firms raised 79.4% of capital, the highest concentration in a decade.

This balance is achieved through several key benefits inherent in the structure.

• Limitation of liability: This structure protects LPs from any fund losses beyond their committed capital. It also shields the individual GPs, who operate through an LLC, from personal liability.
• Tax efficiency: Limited partnerships are often treated as "pass-through" entities for tax purposes.
• Regulatory compliance: This structure is well-established and recognized by regulators.
• Operational flexibility: The partnership model allows for customized agreements with different LPs.

How fund economics flow through the structure

Understanding the entities is the first step; the second is following the money. The standard compensation model in PE and VC is central to how a fund structure works financially. This model is composed of two primary types of compensation for the fund manager:

• Management fee: This annual management fee is typically a small percentage of the fund's total assets.
• Performance fee: Known as carried interest, it is only earned after the LPs have received their initial investment back.

The limited partnership agreement (LPA)

A limited partnership agreement (LPA) spells out what GPs and LPs can and cannot do in a limited partnership. It is the comprehensive legal template that governs the fund, often hundreds of pages long.

Key terms typically defined in an LPA include:

• The fund's investment period
• The process for calling capital from LPs
• The details of the distribution waterfall

Partnership interests

The LPA also specifies partnership interests, which is the amount of the partnership each GP and LP owns. This percentage is usually relative to each partner’s contribution to the partnership.

Amended and restated LPA

An existing LPA can be modified by passing an amendment that adds, deletes, or modifies its terms.

Why Delaware?

Many fund managers decide to form their firm and fund entities in Delaware due to its robust history of decisions about business transactions.

Common fund structure variations

While the standard model is a great foundation, managers often use other structures, such as evergreen funds or co-investments.

Special purpose vehicles (SPVs)

Special purpose vehicles (SPV) are a popular tool for emerging managers.

Parallel funds

A parallel fund is a separate fund vehicle that invests alongside the main fund.

Master-feeder structures

A master-feeder structure is another way to pool capital from different investor groups.

From structure to operations: how Carta connects your fund

Managing a venture fund involves juggling dozens of investor relationships. Carta provides an integrated software platform that serves as the operational backbone for the entire fund structure.

Frequently asked questions about fund structures

What is the difference between a general partner and a limited partner?

The GP is the active fund manager responsible for making investment decisions, while LPs are passive investors who provide capital.

What is the difference between the general partner and the management company?

The GP is the entity with legal control of the fund, while the management company is the operating business that employs the team.

What does "2 and 20" mean in fund fees?

Two and twenty refers to the traditional fee structure for investment funds.

How does a special purpose vehicle structure differ from a traditional fund?

An SPV is a legal entity created to make a single investment in one company.

How much does it cost to set up a fund?

The cost to establish a fund structure varies based on its complexity.

Author: Rita Astoor

Author: Josephine Koh