In a private equity deal with co-investors, the GP (General Partner) sources the deal and operates the company while the LPs (Limited Partners) co-invest in the deal by providing a portion of the initial equity investment.
Since the GP has sourced the deal, performed the majority of the deal diligence, and will likely be investing time and human capital into improving the company’s operations, it’s common to reward the GP for their additional efforts.
The GP may receive a liquidation preference such that they are guaranteed their initial investment back before the LPs receive their initial investment back. The GP may also receive a preferred return which they will receive prior to the LPs.
The GP can also be rewarded and incentivized using a tier system, where profits are split up in predetermined ways upon reaching certain thresholds, usually determined by multiple of capital.