How Management Companies Work in Private Funds
How management companies work in private funds
Author: The Carta Team
Read time: 8 minutes
Published date: 8 October 2025
A management company is the operational engine of an investment firm. Learn how this crucial entity is structured and why it’s essential for liability protection and professional fund management.
What is a management company?
A management company (or manco) is the legal entity that fund managers create to serve as the operational and financial hub of their firm. This entity is legally and financially separate from the fund itself, which is the vehicle that is established by a general partner (GP) and holds capital from limited partners (LPs).
This separation is a cornerstone of professional fund management. The management company is the firm that operates the business across multiple funds. Each fund is a "client" of the management company, which serves as the investment adviser. While the management company is the business account used to pay for the firm's expenses, such as salaries and rent, the fund is a protected entity. It uses its capital solely for making investments into portfolio companies as part of its overall portfolio management strategy.
The management company earns its revenue by charging the fund a management fee. This fee is usually a portion of the total capital the fund manages, paid as an annual fee. For special purpose vehicles (SPVs) that charge this fee, the most recent Carta data shows a growing standardization, with the middle 50% of SPV management fees falling between 1.5% and 2%. The management company then uses this revenue to cover all of its operating costs.
How a management company differs from the fund
To understand fund operations, it’s helpful to see the distinct roles of the management company and the fund. While they work together, their purpose, structure (often defined in a limited partnership agreement (LPA) for the fund), and sources of capital are entirely different. The management company provides investment advice and operates the business, while the fund executes the investment strategy through a process known as portfolio construction.
This clear division is what allows a private fund to function professionally and maintain its structural integrity.
| Attribute | Management company | Fund |
| Primary purpose | Operates the firm and pays expenses | Holds LP capital and makes investments |
| Legal structure | Typically a limited liability company (LLC) | Typically a limited partnership (LP) |
| Source of capital | Management fees paid by the fund | Capital commitments from LPs |
| Key activities | Hiring, paying salaries, compliance, and reporting | Investing in portfolio companies, distributing returns |
What are the core responsibilities of a management company?
The management company is responsible for the investment and non-investment work that keeps the firm running. For a fund's chief financial officer (CFO) or controller, overseeing these functions through proper fund administration is a high-stakes process where accuracy and timeliness are paramount. These duties fall into two main categories: executing the investment strategy and managing the firm's finances and upholding its compliance obligations.
The front office and back office
The management company has both a front office and a back office. The front office handles investment activities, such as scouting for deals and meeting with founders. The back office manages the firm's operational side, including its finances and compliance.
Common expenses the management company pays include:
- Salaries, bonuses, and benefits for the partners and employees
- Rent and utilities for office space
- Subscriptions for software, data services, and research tools
- Legal, accounting, and other professional service fees that aren’t attributable to the fund
- Business development and travel costs
This level of detailed financial management can be a significant challenge.
Why is a management company necessary for fund operations?
Establishing a management company is a strategic necessity for protecting the partners, maintaining the trust of investors, and supporting the long-term viability of the firm. Without this structure, running a professional investment firm would be nearly impossible.
Creating a liability shield for fund managers
One of the most important functions of a management company is to provide a liability shield. The decision to form a limited liability company (LLC) is a structural choice. This concept, which originates with the corporation structure, is sometimes called the "corporate veil."
This legal protection is a fundamental reason why this structure is the industry standard.
Ensuring financial integrity and audit readiness
Separating the fund and management company creates clean, distinct financial records. This is essential for proving the firm is upholding its fiduciary responsibility: the legal and ethical duty to always act in the best interest of its investors.
How are management companies structured?
The legal and economic architecture of a management company is designed for liability protection and operational clarity. The structure is straightforward but has critical components that must be in place.
The role of the LLC
The LLC is the standard legal entity for a management company in the U.S. It offers the liability protection of a corporation with the operational flexibility and tax advantages of a partnership. The formation process involves filing key LLC organizational documents with the state where you are forming the LLC and appointing a registered agent in the state if you don’t otherwise have a presence there.
Defining ownership and economics in the operating agreement
The operating agreement is the internal governing document for the management company's LLC. This agreement is critical because it outlines the ownership stakes, roles, and responsibilities of each partner.