I have seen a requirement in certain hedge fund documents that the general partner in a limited partnership is required to keep some minimum amount of capital in the partnership. The text referenced something about satisfying certain IRS advance ruling guidelines. What was this text likely referring to? Is there a minimum that a GP must maintain in a limited partnership? If a limited partner is a related person/entity of the GP is he/it treated as an LP or a GP?
Hello, I will be assisting you
There may be several reasons for this language. First FINRA’s net capital rule requires a minimum amount of net capital dictated by the type or method of business to be conducted, the securities products involved, and considerations of customer exposure. The statutory minimum amounts of net capital range from as low as $5,000 to over $1,000,000. Rule 15c3-1 outlines the SEC’s net capital rules.
Another reason could that this is language still there from the days that general partners needed to put in at least 1% of the total committed capital of a fund. This was borne out of the general understanding that a general partner would need to have a minimum capital to be treated as a partner for tax purposes and therefore be entitled to capital gains treatment on its carried interest
These days 1% may not be enough to be considered significant as the general partner's interests are considered in relations to the LPs. Rather the determination of what constitutes “significant” will be driven, in part, by what the GP can afford, i.e., what is meaningful enough to the GP personally to actually align their interest with the LPs interest
Thank you for allowing me to assist you
Thanks. I do think that it mentioned 1%. Are you answering the question "Is there a minimum that a GP must maintain in a hedge fund partnership?" with the answer that yes there is and it must be at least 1% but may need to be more?
I am looking at a fund where the GP is an Investment Adviser LLC that is controlled by a person (the RIA) who has put most of the money into the fund from himself and various family entities as limited partners. I do not think that the LLC entity itself has contributed any funds. I am convinced that the RIA has aligned his interest with the LPs. What I want to know is whether the GP itself needs to contribute funds and whether the RIAs various family interests will be considered as GP funds. Are those related party family funds more at risk than other LPs?
Yes. That would be my answer
As noted the requirement of the GP to contribute any of his own funds vary by the type of investment. Look up the FINRA rule I referenced above it discusses this.
So the GP is treated separately from the RIA who controls the GP. He should contribute some of his money as a general partner share rather than a limited partner share?
A GP can be both general and a limited partner
the way to find out how much a GP puts in put of his own money is to read the partnership agreement / prospectus
Rule 15c3-1 seems to have to do with net capital requirements of broker-dealers but nothing to do with how much an investment adviser GP has to put into the funds that it runs.
I read the partnership agreement and it seems that the RIA put lots of his money in as a limited partner but none in as a general partner, hence the questions.
a GP can be a broker dealer as well
The GP is not a broker-dealer.
in connection with the GPs activities to fund raise
I am not sure what that means.
sorry I pressed enter too soon. The GP can act as a broker dealer but then it has unlimited liability
This GP is not acting as a broker-dealer.
then in that case there is no mandatory minimum
it is often a marketing badge of honor for the GP to assert that a certain % of their capital is in the fund
I think that is exactly what they are doing. But it seems that the GP's owner's investments as limited partners are not subject to the GP's unlimited liability. Since the GP itself has no funds in the game, there are apparently no funds that have the greater liability attached to them. I am not sure what this means in practice.
They are basically taking credit without having skin in the game (so to speak)
it does happen quite often but take it with a grain of salt
Well they have enough skin in the game that I am convinced that they want the fund to succeed but is there any value to other limited partners to have the GP itself have some funds in the game? Does the unlimited liability ever kick in before all the limited partners money is gone anyway?
My main concern is that the fund is proposing to invest in some futures which in theory could produce liabilities far greater than the total value of the fund. Presumably, in such a case, the exchange would go after the GP and possibly after the owner's of the GP and if that whole entity were somewhat shaky they might try to come after the limited partners. True or false?
The last question is too broad to answer and I am certainly not in a position to determine what the SEC might do. To a large degree it's not the money left in the pot but the potentiality of legal claims against the GP.
I trust I resolved the questions you asked about the required minimum
I am not sure. Have you said that the GP is required to put in funds in addition to the funds put in as limited partners by the fund's owners? Is there a reference to the rule other than that about BDs that you reference above?
If this GP has not put in funds and they are breaking the law then I want nothing to do with them. If the family funds meet all the requirements and the GP is not breaking the law then it all seems fine.
This is outside the initial question. If this is a LLP then there has to be at least one GP. As noted there is no minimum requirement for GP to invest their own capital
We can continue to explore the matter under a new question if you are interested.
in most cases GP don't want LPs messing with their fund so it is interesting what you noted
Thank you for your continued patronage!
Ah, I think this is the first time that you have mentioned that there is no minimum requirement for a GO to invest its own capital. I thought you said the opposite, that there is a minimum of 1% and maybe much higher. Can you clarify the answer to the original question? Is there a minimum that a GP must maintain in a limited partnership?
It worries me when you say "in most cases GP don't want LPs messing with their fund so it is interesting what you noted" that we have some sort of misunderstanding since I do not think that I have noted anything to do with LPs messing with the fund. I still want an answer and hopefully a reference to the first of the original two questions. I am satisfied as to the second original question that it is complicated and beyond the scope of what you care to answer. Let us leave it at "what is the minimum that a GP must maintain in the hedge fund limited partnership"?
The 1% is not mandatory but a figure that was used in the past to justify and classify distributions as capital gains. It comes from the IRS's requirement that the GP have substantial investment in the fund to enjoy the more favorable capital gains tax rate vs. the potentiality for the GP to be taxed as self employed.
Thanks for clarifying.
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