LP and GP: who carries what when the plan slips

A friend offers you a piece of a deal. You wire money, you get a share of the profit, someone else does the work. That is roughly the pitch, and roughly true.

The words underneath it are limited partner and general partner, and they describe two different jobs with two different kinds of exposure.

The limited partner puts in capital and nothing else. No decisions, no signature on the loan, no phone call when a boiler fails. The liability is limited to the money invested, which is where the name comes from. An LP can lose the whole investment and not a dollar more.

The general partner, also called the sponsor, does the opposite. Finds the property, underwrites it, signs the loan, hires management, decides when to refinance or sell. The GP usually signs a personal guarantee on parts of the debt. That signature is the difference that matters most and it rarely appears in a summary deck.

Round numbers, as an illustration rather than a real deal. A property costs $10,000,000. The loan covers $6,500,000, so the equity needed is $3,500,000. Limited partners bring $3,325,000 and the sponsor brings $175,000, which is five percent of the equity.

Now the plan works and the property sells for a $2,000,000 gain. Under a common structure the LPs receive a preferred return first, then the remaining profit splits seventy to the LPs and thirty to the GP. The GP put in five percent of the money and takes thirty percent of the upside beyond the preference. That gap is the promote, and it is payment for the work and the risk that is not capital.

Now the plan does not work. Occupancy sits below the forecast, the loan comes due, the refinance is short. LPs stop receiving distributions and may be asked for more capital. The GP is in the same hole plus a guarantee, plus every investor relationship they have.

This is the part worth holding onto. The GP's downside is not a smaller version of yours. It is a different shape.

Which has a practical consequence. Alignment is not proven by a sponsor saying they are aligned. It shows up in how much of their own money is in the deal, and whether it went in on the same terms as yours. It also shows up in their fees. A sponsor paid well enough that a mediocre outcome stays comfortable is not carrying the risk you are.

Ask three things before you wire. How much did the sponsor invest, in dollars, and on what terms compared to mine? What portion of their total compensation comes from fees at closing versus profit at the end? What happens to my position if the partnership needs more capital and I decline to contribute?

A partnership is a set of obligations that only become visible when something goes wrong.

If this deal returned nothing at all, who on the sponsor side would feel it, and how much?