Bridger Pennington breaks down the two-entity private equity structure: a General Partner manages the fund while Limited Partners invest capital and are bound by the LPA and PPM agreements. Regulation D Rule 506 lets funds raise unlimited capital from accredited investors, and the GP has a fiduciary duty to the fund, not individual investors.
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Hey guys, welcome back to Investment Fund Secrets. I'm Bridger Pennington. So in this episode, we're going to walk you through basic fund structure. Now this structure I'm going to walk you through is how 99% of all funds and all money raised in the world comes through this model. Yes, there are exceptions. In other videos, I can talk you through different ways and different ways to do this, but I'm just going to teach you the bread and butter way that most funds are structured because this gives you the most protection possible and is a way that you can raise unlimited amounts of money. Sounds pretty good, right? Okay, let's dive into it. Right here, first step, you have your general partner, your GP, and I'm gonna put GP right here. This is essentially what I call the management. This is you, right? And this is, these boxes I'm about to draw are all entities, just to keep that clear. So this could be an LLC, this could be, excuse me, LLC, this could be an S corp, C corp, whatever your lawyer wants to set up. It's just a simple entity. And this entity, its sole purpose is it's a governing partner. It's the general partner over the limited partnership. So I'm gonna put limited partnership next to the general partner. This could also be called your fund. I'm gonna put that in quotes right here. So this is actually the actual fund that money comes into. And in this fund, you have investors, but in here they're called limited partners. partners or LPs. That's kind of what the terminology people say. So I'm going to put LP up here. These LPs come into the fund, the limited partnership, and they put their money in. So let's say I put up, you know, this lady, she comes in with, let's call it $5 million, and this, you know, guy comes in with $2 million, and this person comes in with $3 million, okay? You have a $10 million fund. Awesome, right? From 3 investors, and you can also be an investor in this as well. So they've put money in. I'm going to underline that in green so it looks like money. They've all come into the limited partnership. You are the general partner and have governing say over what happens in the limited partnership because you are the general partner. They are limited partners in their name. They are limited on their liability and then also what kind of say they have over the money as well. This is all detailed and outlined in what is called the LPA, Limited Partnership Agreement, and your PPM, your Private Placement Memorandum. These are two very thick legal documents. They're very expensive usually, and I'm gonna teach you a way to not have it as expensive, but these are usually very expensive. These are what we term as the Bible in your fund. These govern everything that happens. Your investors, your limited partners come into your fund. They put $5 million, $2 million, $3 million into the fund. They have to sign an LPA agreement and a PPM agreement and approve those documents. What these documents essentially are saying is what your fund can and can't do. It's gonna run through all the stuff I'm gonna talk through in this course. It's gonna walk through all of those details of what is happening in the fund. That's why it's very good for you to know that. Yes, you can go start a fund, you can go hire a lawyer for 50 grand, but you need to understand these documents in and out because investors, limited partners are gonna ask you about little minute details on page 54 that you didn't even know about and you need to understand what's happening there. That's what the purpose of this course and all the material I'm trying to share is to help you understand what is happening in your LPM, PPM, and what could happen, right, when drafting your own documents. Okay, so they come in, the Bible is amazing because guess what? You get to write the Bible, that's the best part. You get to put all the covenants and commandments in there. Imagine if you wrote the real Bible, like a religious book, right? You could put all of the documents and covenants and everything, all the rules are set in there and once it's set, it's set and everyone's got to obey. So investors come into your fund, Your LP and PPM will say once they put money in, they have no say over the money and you as the general partner now can go invest in almond trees, you guys can buy solar farms, you can go invest in South America and car dealerships, whatever your fund is going to do and there's, yes, there's funds that do all of those things. Don't— I'm not lying to you, there's funds that do all sorts of stuff. Your fund mandate will say what you are going to do. So if your fund says we are going to do almond trees, this is a real fund, I'm not even kidding, Almond Tree Fund. That's your, you know, investment thesis. That's your charter in your LP and PPM. Typically, you like to stay a little bit more narrow. If you get a great deal, that's a great real estate deal, not associated with almond trees at all, but it's just a cool apartment building, you're like, this is a great deal. According to your LP and PPM, you cannot go invest in that unless it says we are open to other investments. But typically, a fund will say we are investing in almond trees and almond trees alone. That's what our charter is. here for and that's what investors put money into the fund because they believe you have expertise over almond tree. You got to stick to your investment thesis. Now, if you do, if you don't break any of these covenants commandments, that's how 8 guys on Wall Street can manage $100 billion and their biggest investor over here, let's say this, you know, we have investor that put in $500 million, just an example. They can call you up and be like, Bridger, you know what? I love what the fund's doing but I didn't pay taxes last year. Can you sell some of the almond tree farms early? so I can get paid and get my money out? And you go, sorry, right? This investor's giving you $500 million, one of your biggest investors. You say, sorry, my duty is to the fund and the fund alone, not to you as an individual investor. I have— the LP and PPM says I have a responsibility to the fund, and these almond trees aren't ready to be sold yet, and I'm sorry, we can't sell them early. And they're gonna yell and scream, and they can, you know, be mad all they want but the fact is you are the general partner and you have governing governance over the limited partnership and that is your true client. Does that kind of make sense? You bought almond trees, you're doing well, right? The fund starts making money, this is what happens. The fund and this will be in your waterfall. In a different episode, you'll see how we split up the waterfall of how everyone gets distributed but when you get a performance fee over your pref, that will kick money back to your general partner and to your limited partnership pro rata how much money they put in. Now, there are a few different ways that you can file this with the SEC. The most common filing is under Regulation D 506. Now, this SEC requirement says that you can raise unlimited amounts of money in this structure. However, you cannot publicly advertise and you have to raise money from accredited investors. In a future episode, you'll see what is an accredited investor. These are essentially people that have a net worth of $1 million or more or make $250,000 a year. And they just have to check a box that they are accredited investors under a 506. Yes, there are 506s, there's Regulation A funds, but this one right here is the most common fund in the entire world. 95% of all money comes through what's called a Regulation D 506 fund. And they have an LPA and PPM. They run a general partner, limited partnership type of fund. This is the basic structure of how funds work.
