Who is in charge of partnership funds?

By Catherine Chen and Yang Yurun, Zhong Lun Law Firm
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When discussing the management of partnership funds or execution of partnership affairs, the terms of general partner (GP), managing partner and fund manager are often brought up. In practice, these three roles are usually confused by many people, while in fact these roles have different responsibilities. When a fund has two or more GPs, or a fund manager and GP are assumed by different entities in a fund, distinguishing between the rights and responsibilities of different entities becomes especially important.

GP and managing partner. Based on the regulations of the Partnership Enterprise Law, the managing partner is the general partner entrusted to represent the partnership enterprise and execute partnership affairs, either in accordance with the stipulations in the partnership agreement or upon the decision of all partners. Therefore, a managing partner is definitely a GP. However, when there are multiple GPs in one partnership enterprise, a GP is not necessarily a managing partner.

Catherine Chen Partner  Zhong Lun Law Firm
Catherine Chen
Partner
Zhong Lun Law Firm

When there are multiple GPs in one partnership enterprise, theoretically, all partners can entrust one or multiple GPs to act as the managing partners. In practice, however, it is uncertain whether two or more entities are allowed by a local Administration for Industry and Commerce (AIC) to be registered as the managing partners. Based on the authors’ experience, many local AICs only approve listing one GP as the managing partner.

Fund manager. Based on the regulations on private equity (PE) funds, a PE fund manager must apply and register with the Asset Management Association of China (AMAC). A GP can appoint itself as the PE fund manager, or can appoint a professional PE fund management institute as the manager in charge of fund management and operations.

Therefore, the role of a fund manager is not necessarily performed by a GP or a managing partner. But if a GP or a managing partner intends to act as the fund manager, it must first register with the AMAC to be qualified.

As analyzed above, a managing partner must be a GP but a GP is not necessarily a managing partner, while the roles of GP and fund manager may overlap or differ. Their relationships are simplified in the graph (see the graph in this article).

Yang Yurun Associate  Zhong Lun Law Firm
Yang Yurun
Associate
Zhong Lun Law Firm

In practice, it is possible to encounter situations where there are two GPs or more, or two fund managers or more, in a fund. According to the related regulations listed in the AMAC’s asset management business electronic registration system, when the roles of PE fund manager and GP are taken by different entities, the two entities must be affiliated. Based on the authors’ understanding, such a regulatory requirement is set up to forbid entities that have not completed the fund managerregistration from issuing wealth management products (WMPs) through alternative channels. In addition, the AMAC no longer accepts registration application of dual-manager funds.

In practice, when a fund manager acts as a GP and a managing partner of a limited partnership PE fund at the same time, its responsibilities usually include, but are not limited to: fund raising, fund registration, making investment decisions, executing investment decisions, post-investment management and fund exiting; information disclosure and submission; signing external documents on behalf of the partnership enterprise; drafting and sending demand notes; setting up bank accounts; book keeping and archiving; handling tax-related businesses; filing lawsuits on behalf of the interest of the partnership enterprise; and other rights specifically granted by the partnership agreement. Under such circumstances, where it is the same entity that is in charge of these responsibilities, it makes little difference in distinguishing whether the entity obtains the authorization and performs these responsibilities as the fund manager or as the managing partner. Therefore, the authors have noticed that many partnership agreements do not specify on such differences in practice.

When the roles of fund manager and managing partner are taken on by different entities, the division of responsibilities is necessary. Although regulatory authorities have not set up specific regulations regarding division of responsibilities between fund managers and managing partners under such circumstances, based on the principles of past regulations, theoretically, responsibilities related to fund raising and fund investment management should be assigned to fund managers, while transactional duties can be performed by managing partners. But it is not easy to divide these responsibilities clearly between different entities in detail.

Without the fund manager qualification, a managing partner who takes on the responsibilities related to fund raising or management may be deemed unqualified to manage funds and accordingly face compliance risks. If a fund has two or more GPs, division of responsibilities between the GPs is inevitable, making the situation even more complicated, in which all parties need to take account of actual business arrangements and the AMAC’s regulatory principles, and form holistic views and judgments on the division of responsibilities of different entities in practice.

Catherine Chen is a partner and Yang Yurun is an associate at Zhong Lun Law Firm

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