Viewpoint... The relationship between general partners, executive partners and fund managers and the division of powers and responsibilities in the fund's dual GP model.

Published:

2022-12-01

In practice, due to the diversification of the demands of all parties involved in private equity funds, the dual-GP model or even the multi-GP model is often used in the establishment of partnership private equity funds. This paper analyzes the relationship and division of authority and responsibility between the general partner, the executive partner and the fund manager in the dual GP model as follows: Definition of 1. General Partner (I) related regulations General Partner (GP) is a legal term under the Partnership Law, and according to Article 2 and other provisions of the Partnership Law, a general partner refers to a partner who bears unlimited joint and several liability for the debts of the partnership. (II) Concerns Laws and regulations or the self-discipline rules of the China Securities Investment Fund Association (hereinafter referred to as the China Foundation Association) have less provisions on the rights and obligations of GP, but GP often serves as the executive partner (hereinafter referred to as the executive partner) or the private equity fund manager (hereinafter referred to as the manager), and the relevant laws and regulations or the self-discipline rules of the China Foundation Association have more requirements for the executive partner or the manager. Definition of 2. executive partner (I) related regulations Executive partner (hereinafter referred to as executive partner) is also a legal term stipulated in the partnership enterprise law. According to the provisions of articles 2, 26 and 67 of the partnership enterprise law, the executive partner refers to the general partner who represents the partnership enterprise and executes the partnership affairs in accordance with the agreement of the partnership agreement or the entrustment of all the partners. (II) Concerns 1. The executive partner must be a general partner, but the general partner may not be an executive partner, so GP is divided into executive GP and non-executive GP; 2. The authority to execute the affairs of the executive partner is derived from the entrustment authorization of all partners, and a legal relationship of entrustment is established between the executive partner and other partners; 3. In the case of more than one GP, all partners can theoretically entrust one of them as the executive partner, or more than two or more GPs as the executive partner. Definition of 3. private equity fund manager (I) related regulations The Securities Investment Fund Law, the Interim Measures for the Supervision and Administration of Private Investment Funds and other existing laws and regulations have not clearly defined fund managers. However, according to the relevant self-discipline rules and practice of the China Foundation Association: private equity fund managers should be the fundraisers and managers of private equity fund products, and their main responsibility is to be responsible for the investment and operation of fund assets in accordance with the agreement of the fund contract. On the basis of risk control, strive for the maximum investment income for fund investors. The manager of a partnership private equity fund may be a GP or a related party of the GP as the manager. (II) Concerns In accordance with the above provisions and filing practices: 1. The general partner, the executive partner and the fund manager are inconsistent in some cases, and the "trinity" is the state of the three in certain circumstances. 2, according to the filing requirements of the China Foundation Association, with the unanimous consent of all partners, the fund management rights can be entrusted to GP or GP's related parties, so theoretically the fund manager may be the partner, non-partner GP, or GP's related parties. There is also a legal relationship of entrustment between the fund manager and the executive partner and other partners. 3, because the "Private Investment Fund Filing Notice" clearly stipulates that the manager of a private investment fund shall not be more than one, therefore, even if multiple GPs in the partnership have the qualification of a private fund manager, there can only be one manager. 4. Dual GP Mode The dual-GP mode is commonly used in the following ways: (I) single partner and manager non-partner GP 1, this model is the more common "double GP" model, by the private equity fund manager qualification GP1 as the executive partner, GP2 does not serve as the executive partner, may not have the private equity fund manager qualification. 2. In this model, GP1 has greater rights and the partnership is executed and managed by GP1. GP2, on the other hand, has neither the status of a partner nor the status of a manager, has a lower participation in the fund and can exert less influence on the operation of the fund. (II) double-partner single manager. 1, this model is also more common, GP1 as the manager and at the same time as the executive partner; GP2 as the executive partner but not the fund manager. 2. Under this model, both GP1 and GP2 have the authority to execute partnership affairs, but according to the requirements of the CFA, there can only be one fund manager, so matters involving fund management should be primarily exercised by GP1. The permissions of GP2 are subject to certain restrictions, as detailed in Part V of this article. (III) non-partner GP and manager single partner 1. In this model, one GP acts as the manager but not the partner, while the other GP acts as the partner. 2. As mentioned above, the executive partner and the administrator form a legal relationship with the other partners. Among them, the entrustment authority of the executive partner comes from the legal provisions such as the Partnership Law and the agreement of the partnership agreement, while the entrustment authority of the manager comes from the agreement of the partnership agreement and the agreement of the entrustment management agreement. Under this model, the administrator's authority is relatively weakened, and because he does not have the status of a partner, the administrator cannot directly enjoy the rights of the partner as stipulated in the partnership law and agreed in the partnership agreement. It can only carry out fund management work in accordance with the authorization of the partner and other partners in the partnership agreement and the entrustment management agreement. For some fund management work, it may require the cooperation of the executive partner to complete. To some extent, there is a certain restraint between the executive and the administrator. 3. In practice, the adoption of this method requires attention to how the manager performs the fund management work completely without acting as a partner, and ultimately protects the rights and interests of the fund and all partners. It is suggested that consideration may be given to agreeing in advance, for example, through an agreement, on the partner's obligation to cooperate and the administrator's exemption clause. In addition, in accordance with the regulatory requirements of the China Foundation Association, for the above-mentioned first (II) and (III) models, the parties should not use this to carry out channelization business, there is a channel behavior of the fund will not be filed. Therefore, it is important to avoid a broader agreement on the rights of non-administrators, especially if the partner is not registered as a fund manager, in order to avoid being identified as a channel-borrowing act. (IV) Single Executive Partner and Manager Financial/Investment Adviser As mentioned earlier, GPs who do not serve as managers and partners have a low degree of participation in the fund, and in order to appropriately address some of the demands of such GPs, this model has emerged in practice. Under this model, the GP does not act as an administrator or executive partner, but provides advisory services as a financial/investment adviser, thereby collecting the associated fees. In addition, GP2 may not even act as a general partner of the fund, but only as a financial/investment adviser entrusted by the fund, as an adviser to participate in the operation of the fund and obtain income, from the operational level is more flexible. Judging from the current regulatory regulations of the China Foundation Association, there is currently no prohibition on subjects that have not been registered as managers as financial advisors for equity private equity funds, but only qualification requirements for investment advisors for securities private equity funds. However, from the overall trend, the requirements for financial advisers of equity private equity funds may also be more stringent in the future. (V) GP and administrator separation 1. In the single GP mode or the dual GP mode, the manager can also be separated from the GP. 2, "Private Investment Fund Contract Guidelines No. 3 (Guidelines on the Essential Terms of Partnership Agreements)" stipulates that "the manager of a partnership fund may be an executive partner of the partnership, or it may be entrusted to other private equity fund management institutions". According to the above provisions, the fund manager may not be a partner or even a GP. However, the China Foundation Association requires that an association relationship must be formed between the GP and the fund manager, where the association relationship must be confirmed in accordance with accounting standards or formed through management appointments. 3. This model is similar to the problems faced by the (III) dual GP model. The manager does not have the status of a partner and only obtains the management authority through the agreement. The adoption of this model requires attention to two types of issues: (1) How does the manager perform the fund management work completely without serving as the executive partner, and ultimately protect the rights and interests of the fund and all partners. If the manager is related to the partner GP, the problem can be solved to a certain extent. However, if the manager is not related to the partner GP and only has a relationship with the non-partner GP, the partner's cooperation obligation shall be agreed through agreement and other means. (2) Since the manager is not a partner and does not sign a partnership agreement, the LP is not a counterparty to the contract, and the manager is isolated from the LP. In the event of a breach of contract or failure to exercise due diligence by the administrator, it is more difficult for LPs to defend their rights. For LP, it is suggested to reduce the above risks by LP participating in the signing of the entrustment management agreement and GP issuing unilateral commitment. 5. the division of rights and responsibilities in the dual GP model. (I) principle of division of powers and responsibilities 1. Key points of concern The dual GP mode has always been the focus of the China-based association when filing. The essence of the core issue is how to reasonably divide the responsibilities and authorities of the dual GP, whether there is a disguised occupation of the channel and disguised engagement in the dual manager structure. 2, the main business of different partnerships, its partnership affairs are also different. For a partnership fund, its partnership affairs are mainly the foreign investment and management of the fund and the day-to-day administrative affairs, and the foreign investment and management of the fund is the natural responsibility of the manager. Therefore, in theory, the execution of partnership affairs can include fund management affairs. 3, in the single GP model, the executive partner and the manager overlap, all external representative partnership, internal management and other rights and obligations should belong to the executive partner. However, in the double GP mode, especially when the executive partner does not act as the manager, due to the unanimous agreement of all partners to entrust some rights to the manager, the rights of the executive partner are bound to be limited. Even if they have the qualification of private equity fund manager, they can only participate in the operation of the fund and assist the manager in the management work in a compliant manner, but they cannot be agreed to be directly responsible for the fund management affairs. At the same time, for non-executive managers, or managers whose non-GP is only a GP affiliate, the exercise of some of their rights requires the cooperation of the executive partner. (II) specific division of powers and responsibilities 1. Powers and responsibilities of the fund manager According to the self-discipline rules of the China Foundation Association and the requirements of filing practice, and in combination with the above-mentioned principles of division of powers and responsibilities, regardless of whether the fund manager is an executive partner, a non-executive partner GP, or a non-partner associated with GP, matters related to fund raising, investment, post-investment management, and withdrawal shall be the responsibility of the fund manager, which may include: (1) Raising funds in accordance with the law and preserving information related to fund raising; (2) To co-organize the fund filing procedures in the China-based Fund; (3) Responsible for fund investment (including pre-investment due diligence, investment decision-making, post-investment management, investment exit, etc.); (4) Disclosure of information to investors; (5) After the liquidation of the fund, the liquidation procedures shall be handled by the Fund; (6) Other duties stipulated in laws and regulations, the self-discipline rules of the China Foundation Association and the fund contract. 2, non-manager of the duties of the partner. A partnership agreement may agree on the rights of a non-administrator to hold a partnership in addition to the duties of the administrator as expressly stipulated in the laws and regulations and the self-discipline rules of the China Foundation Association. It is not in line with the market-oriented law of fund operation to completely prohibit non-managers from participating in fund operation. However, non-managers should participate in fund operation under the requirements of supervision. They can assist managers to complete and appropriately participate in fund investment, management and withdrawal other than fund raising, and can be responsible for daily administrative affairs, including: (1) Take actions necessary to maintain the legal existence of the partnership, safeguard or obtain the legitimate rights and interests of the partnership and carry out business activities as a partnership, such as finding office space for the partnership, signing lease contracts, recruiting administrative and cleaning personnel, etc; (2) Appoint members of the voting board, but cannot actually control the fund's investment decision-making power through agreement arrangements, and cannot occupy a majority of seats; (3) Engage professional intermediaries and consultants to provide services to the partnership; (4) Assist in the search for, development of potential investment projects with investment value and provide them to the Fund and the Manager; (5) Providing advice to the partnership on matters such as investment structuring arrangements and assisting the manager in negotiating the terms of the investment and completing the investment; (6) Provide advice to the Fund and the Manager on the exit of investments and the disposal of assets. (7) Responsible for the approval and registration of the partnership in the administrative department and tax-related matters.

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