Limited partner

A buyout firm invests other people's money. The investors in its fund are limited partners: pension schemes, insurers, sovereign wealth funds, endowments, funds of funds and family offices. They commit capital for the life of the fund, cannot demand it back, are drawn down deal by deal as money is needed, and have no vote on which companies are bought.

What they are buying is exposure that cannot be assembled on a public market: controlling stakes in private businesses, acquired at negotiated prices, funded with debt an investor could not raise itself, and directed by an owner who can change the board and the plan. The promise made in return for roughly a decade of illiquidity is a return meaningfully above listed equity, after the manager's fees.

Three consequences reach into individual deals and are what an interviewer is testing when a fund structure question appears in a technical interview. Every purchase is underwritten with an exit in mind, because the fund has to return cash rather than hold assets. The hold period is bounded by the fund's life rather than by the merits of the company. And the manager is judged on cash actually returned rather than on the values it writes in its own reports, which is why holding a good business indefinitely is treated as a failure.

The relationship also explains behaviour that looks irrational from outside. A manager that has not returned capital struggles to raise its next fund, which creates pressure to sell even where holding might be worth more, while a fund sitting below its hurdle has reason to hold its best asset longer.