How Private Equity Funds are Structured

Limited Partnership Model: GP and LP Roles

At the core of a private equity fund is the limited partnership agreement (LPA), which formalizes the relationship between the GP and LPs. Private–equity funds are typically limited partnerships. GPs commit 2–5% of capital, source and manage deals, and earn fees plus carried interest. LP investors may include pension plans, endowments, sovereign wealth funds, family offices, and other institutional or qualified investors.

Fund Hierarchy

Private equity fund structures can include feeder funds, parallel vehicles, alternative investment vehicles, and co-investment entities to address investor, tax, regulatory, and jurisdictional requirements.

A tiered setup lets managers match structures to investor needs. An umbrella (master) fund holds the assets. Feeder funds pool money from specific groups, say, U.S. tax-paying investors or EU institutions—and invest in the master. Co-investment vehicles sit alongside the main fund, so LPs can back single deals, usually at reduced or zero fees.

Parallel Funds and Cross-Border Entities

Cross-border private equity structures may use parallel vehicles in jurisdictions such as Luxembourg or the Cayman Islands to accommodate different investor, legal, regulatory, operational, and tax requirements.

Parallel vehicles are generally designed to invest alongside one another, although allocations and investor outcomes can differ based on the governing documents, regulatory requirements, exclusions, and other fund-specific terms.

Fund Lifecycle Overview

A private equity fund progresses through clearly defined phases. Understanding where a fund sits in its lifecycle helps LPs gauge liquidity expectations, risk exposure, and near-term cash-flow demands.

Fundraising and Commitments

Over roughly 6–18 months, the GP markets the fund and collects binding commitments. Funds typically hold one or more closings as investor commitments are secured, subject to the fundraising timeline and limits established by the fund documents. Capital stays with LPs until called, preserving their liquidity.

Investment Period vs. Harvest Period

• Years 1–5 – Investment: The GP draws capital to buy and build companies. Annual call limits and recycling rules in the LPA smooth cash flows.
• Years 5–10 – Harvest: Focus shifts to exits and distributions. New deals slow, and management fees often drop to a percentage of invested rather than committed capital.

Extension and wind-down phase

Most funds last 10 years, with two optional one-year extensions. These extra years give the GP time to exit tough assets. The final phase sees residual holdings sold, audits wrapped up, clawbacks settled, and a last distribution made.

Grasping where a fund sits in this timeline helps LPs match expected calls and payouts to their liquidity plans and risk appetite.

Capital Commitments and Capital Calls

Private equity funds use a pledge-and-draw model—LPs commit capital up front but only wire funds when the GP issues a capital call. This keeps LP cash productive until needed and ensures a disciplined funding process.

How LPs Commit and How GPs Draw Capital

At closing, each investor signs a subscription agreement—say for €25 million—to be drawn over about five years. Capital calls generally draw against investors’ unfunded commitments according to the allocation and funding mechanics set out in the fund documents. LPAs back this with default penalties such as interest charges, dilution, or forced sale of the commitment.

Notice the Structure and timing of Capital Calls

Capital call notices typically provide investors with a defined funding period and outline the amount due, purpose of the call, and remaining unfunded commitment. ILPA recommends at least 10 business days’ notice, with as much advance notice as possible, as well as an estimated range of capital expected to be called to support investor liquidity planning.

Recycling Provisions and Reinvestment Mechanics

Early exit proceeds can be “recycled” during the first few years—often up to 100% of paid-in capital—so the GP can reinvest without raising new money. Recycled amounts are tracked separately, charged fees only once, and after the investment period, any further reinvestment needs LP consent.

Management Fees and Expenses

Typical 2-and-20 Fee Structure

Most funds charge an average of 1.74% of committed capital during the investment period. Performance fees remain the classic 20% carry above an 8% preferred return, though first-time or niche managers may discount headline rates to win anchor investors.

Fee Offsets, Expense Reimbursements, and Fund-level Costs

Deal fees earned from portfolio companies usually offset 100% of the management fee. Organizational costs are capped (often 1% of commitments), while broken-deal expenses, subscription-line interest, and compliance outlays are also borne by the fund but within budget limits. The true cost to LPs is the net figure after these offsets and caps—not the headline “2 and 20.”

Carried Interest and Distribution Waterfalls

Carried interest is the GP’s share of profits, typically earned after LPs receive a minimum return. The distribution waterfall outlines how proceeds flow from investments to LPs and the GP. For a step-by-step explanation, see Alter Domus’ guide to private equity distribution waterfalls.

Preferred return, catch-up, and carry

First, LPs get their preferred return. Next comes a short “catch-up” stage where proceeds flow to the GP until its share of profits equals the agreed carry rate. After that, any remaining gains are split 80% to LPs and 20% to the GP.

Deal-by-deal vs. Whole-of-fund waterfalls

A deal-by-deal waterfall pays carry on each successful exit, letting the GP collect early but creating higher clawback risk if later deals underperform. A whole-of-fund waterfall waits until the entire portfolio clears the hurdle, delaying GP payouts but giving LPs stronger downside protection.

Clawbacks and escrow arrangements

If early distributions result in the GP or other carry recipients receiving excess carried interest, the clawback provisions in the LPA determine the amount to be repaid and the timing and calculation of that repayment. LPAs can also use escrow arrangements to retain a portion of carried interest until specified fund-level conditions or reconciliation points are reached.

Co-investment and Sidecar Structures

Why GPs Offer Co-investments

Co‑investments let managers tackle deals too big for the main fund alone, spread risk, and give select LPs a closer look at underwriting. According to Adams Street Partners’ 2025 Global Investor Survey, 88% of respondents planned to allocate up to 20% of capital to co-investments.

Co-investment Economics and Terms

Co-investment economics commonly differ from those of the main fund, including the treatment of management fees and carried interest. Specific terms are established by the vehicle and investor arrangements.

Governance and Fee Differences

Because LPs assume single‑asset risk, economics are lighter—often no base fee and only 1% management, 10–12% carry versus the standard 2% and 20%. Control stays with the GP, but co‑investors receive richer reporting, and any potential conflict with the main fund must clear the LP advisory committee review.

Continuation Funds and Secondary Structures

The Rise of GP-led Secondaries

Secondary deal volume hit $162 billion in 2024, a record, with GP‑led transactions accounting for nearly half. Activity continues in 2025: Neuberger Berman closed a $4 billion GP‑led fund in June, quadrupling the size of its 2020 predecessor.

Structuring Continuation Vehicles

A continuation vehicle transaction typically involves transferring one or more assets from an existing fund into a new vehicle and giving eligible existing investors the opportunity to sell or roll their interests. Valuation, conflicts management, investor approvals, financing, and the economics of the new vehicle depend on the transaction and governing documents.

Impacts on Fund Performance and LP Alignment

Properly executed, a continuation fund can boost near‑term distributions in the selling vehicle, give the GP more time to grow value, and let rolling investors avoid an untimely sale. Mismanaged, it can double‑charge fees or skew track‑record optics.

The key is transparent pricing, recycled carry that reflects genuine performance, and clear disclosure so every party can judge whether staying in—or stepping out—makes economic sense.

Legal and Compliance Considerations

Subscription Agreements and LPA Terms

Investing in a private equity fund starts with a subscription agreement, where LPs commit capital and confirm eligibility. The Limited Partnership Agreement (LPA) is the core contract outlining the fund’s rules, covering fees, investment limits, governance rights, and removal provisions. Understanding both documents is essential before committing.

Key-man Provisions and Fiduciary Obligations

Key person provisions define the consequences of specified senior investment professionals ceasing to devote the required time to the fund. Depending on the LPA, those consequences can include suspending or restricting investment activity. This ensures continuity in leadership. Private equity managers also have fiduciary duties—they must act in the best interest of LPs. In the U.S., the SEC enforces these duties. In the EU and UK, regulations like AIFMD and FCA rules ensure similar oversight and transparency.

Regulatory Oversight and Disclosures (SEC, AIFMD, etc.)

he regulatory requirements applicable to private equity funds and managers depend on the fund structure, manager status, investor base, marketing activity, and jurisdictions involved.

Applicable requirements can affect areas such as registration or authorization, investor disclosures, reporting, valuation, marketing, governance, and recordkeeping. Because requirements vary by jurisdiction and manager status, fund structures should be assessed against the rules that apply to the specific vehicle and operating model.

Questions LPs should ask about fund structure

As private equity fund structures expand across parallel funds, feeder vehicles, co-investments, and multiple jurisdictions, administrative complexity increases. Managers need consistent processes for entity-level accounting, capital activity, allocation calculations, investor reporting, and data management across the structure. Maintaining an accurate and auditable view across vehicles becomes particularly important as the fund scales and investor requirements evolve.

Supporting Transparency Across the Fund Structure

Transparency across a complex fund structure depends on clear governance, consistent application of fund terms, reliable entity-level accounting, and accurate investor reporting. Maintaining documented allocation methodologies and auditable records across vehicles can help managers support reporting requirements and manage operational complexity as the fund evolves.

 Explore Alter Domus’ Private Equity Fund Solutions to see how integrated fund administration, reporting, and technology can support increasingly complex fund structures.