A Glossary of CRE & PropTech Terms
Most investment partnerships in real estate and private equity (including venture capital funds) follow a common LP-GP structure. The roles of the GP (General Partner) and the LP (Limited Partner) are important to understand, as they differ in their responsibility, and liability. Understanding this relationship, and their motivations can provide insights into how to approach a VC for investment, or a real estate company as a customer. Here, we’ll focus mostly on the LP-GP relationship as it relates to a real estate investment.
What are GPs and LPs?
General Partner: The GP in an investment partnership is responsible for sourcing investments, and the day-to-day management as it relates to an investment or investment fund. In short, the business operations are run by GPs. This means the LPs rely heavily on the GP for performance, and why LPs should be diligent in choosing a GP to work with.
Limited Partner: On the other side of the partnership are the LPs who have a more passive role. They contribute capital to the partnership but have minimal, if any, participation in the day-to-day management of an investment.
How Do They Make Money?
General Partner: To fund the day-to-day operations of their firm, GPs typically collect a management fee - a percentage of the total capital that they oversee. For the extra work required by the GP (compared to the LP), they are compensated disproportionately, in their favor, for a job well done. How the profits are split differs between VC and CRE, and will vary depending on other factors like the macroeconomic environment.
Limited Partner: LPs, like any other investor in the market, generate a profit relative to the contribution they make to a fund. The exception is that their returns are adversely affected by the management fee that is owed to the GP, and, depending on the profit-sharing structure (promote structure), they will get less than their “pro rata” if the GP achieves a certain level of performance.
Why it Matters?
For a PropTech company selling to a real estate organization, it's important to understand the personas you’re dealing with and their underlying motivations. If you’re dealing with an Asset Manager or a company that refers to themselves as an operator, you’re talking to a GP. These folks are the middle layer between the property manager and their LP. Their job is to optimize performance throughout an asset's lifecycle, which includes not just property-level operations, but things like taxes, insurance, and capital planning. More importantly, beyond the management of the asset, the GP must also manage relationships with their LP and their PMC (property management company). Just as much as they care about a property’s performance, they care about managing these relationships.
