What the Fund? - Fund 101
March 21, 2023
7 min

How are Venture Capital and Private Equity Funds structured?

In recent years, there's been a lot of hype around venture capital (VC) and private equity (PE) funds. Larger fundraising rounds and deals have even caught the attention of the mainstream media. So how are these funds structured? In this blog post we give you some answers to the most important questions! Whether you want to work for a fund, start your own, invest or just learn more about private markets, this is for you!

Quick Question: What is the minimum amount of entities a standard fund construct has?

  • 2 Entities
  • 5 Entities
  • 7 Entities

Answer: It has (1+2+2) Entities. The "Fund KG", "Management GmbH", "GP GmbH", "Team KG" and "Carry KG".

The Key Stakeholders of Funds!

Stakeholder management is a critical task for funds, especially large funds that may have thousands of individual stakeholders. The structure of the fund is designed around these stakeholders. They can be grouped into the following categories.

  • The fund manager (managing director or general partner): They run the fund, set it up and make the investments. They typically invest alongside the investor, charge a base fee and receive additional returns for their performance.
  • The investor (limited partner): They invest their money in the fund and expect attractive returns. They can be individuals or companies.
  • The government: Governments shape financial institutions through regulation and taxation. They want their share of the profits and try to prevent the misuse of funds, in this case for money laundering.

What is the goal behind the fund structure?

Firstly, the objective of any fund is to generate attractive returns. Even funds that focus on socially or environmentally responsible investments promise returns to their investors.

The fund structure is designed to ensure a tax-free cash flow for investors and general partners. If this weren't possible, they would end up paying tax twice – once when the returns reach the fund level, and then again when they get to their own bank accounts.

General Partners (GPs) have a second goal when setting up a fund structure. It's to remove personal liability if the fund goes bust.

Finally, there's a third aspect to all this. Funds offer additional services to improve the investor experience, such as anonymous investing or a special entity for US investors – more on this later.

The Entity Types

In Germany, funds use the entity types Kommanditgesellschaft (KG) and Gesellschaft mit beschränkter Haftung (GmbH) to achieve their goals:

  • Kommanditgesellschaft (KG): The KG is a unique entity with two types of shareholders: one with full personal liability and one with limited liability. The popularity of the KG stems from its 'transparency' principle, whereby profits 'flow through' it and taxes are paid at the shareholder level. It is therefore tax neutral.
  • Gesellschaft mit beschränkter Haftung (GmbH): A GmbH is a type of limited liability company, similar to an LLC or LP. It can be used to reduce the liability of a KG. By having a GmbH as the shareholder with full liability in a KG, the liability is limited to the assets under the control of the GmbH.

These two entity types allow funds to distribute their returns directly to the investor without paying taxes in the process and limit the personal liability for GPs.

Overview of a standard fund structure

The Fund Structure

This structure is mainly applicable in Germany. Other countries have very similar structures, but with different entity types. We will be working with at least five entities to build our sample fund. Here they are:

  • ABC Fund KG
  • ABC GP GmbH (Full Liability Shareholder of the ABC Fund KG)
  • ABC Management GmbH (Limited Liability Shareholder of the ABC Fund KG)
  • ABC Carry KG
  • ABC Team KG
  • ABC Trust UG or GmbH (optional)
  • ABF Feeder KG (optional)

To make it more relatable, we use the imaginative ABC Fund as an example to show you how a fund is structured. Let's start with the Fund itself.

The ABC Fund KG

This is the entity into which LPs and GPs invest their money. It's tax-neutral (because it's a KG), so returns go directly to investors without being taxed. The LPs are the limited liability shareholders, which is why they're called "limited partners".

In addition, there is the ABC Management GmbH, which acts as the management of the fund and brings together all the staff working for the fund.

The general partner is ABC GP GmbH. This is the intermediary between the general partners and the ABC Fund KG.

When the GP launches another fund, Roman numerals are added to the entity name. For example, ABC's next fund might be called "ABC Fund II KG".

Note: In Luxembourg the ABC Fund KG would be a "special limited partnership" or "SCSp" and in the US it would be a "limited partnership" or "LP".

  • Luxembourg: ABC Fund SCSp
  • USA: ABC Fund LP


This GmbH is the fully liable shareholder of the KG. Normally, the general partners would invest directly in the KG. But then they would be liable with all their personal assets. This is where the term "general partner" comes from.

That's why they put the GmbH between themselves and the ABC Fund KG. Since a GmbH can only be held liable with what's in it, it removes the personal liability for the general partners.

The ABC Management GmbH

This is the entity that manages the fund. It brings together the team of investment analysts, market experts and operators who take care of investor relations, finance, and other administrative tasks. ABC Management GmbH is also a shareholder of ABC Fund KG. The general partners directly own it.

The ABC Carry KG and ABC Team KG

Funds charge a 2% management fee to pay the investment team. They also earn a share of the profits they make, called the carry. Typically, they take 20% of the returns, but top performing funds can take up to 40%.

Carry is a way of rewarding the manager for investing his experience, network, and time in the fund. However, the basis of the carry is that the fund manager also invests his own money in the fund. This practice was developed to avoid principal-agent conflicts and to align fund managers with their investors. GPs typically invest around 1% of the target fund size in their own fund.

Both the ABC Carry KG and the ABC Team KG represent the entitlement to the carry and the management fee. They are owned by the general partners, and as the transparency principle applies, potential returns are only taxed at the shareholder level and the KGs are tax neutral.

Example: A fund has raised 100 million. All the investors pay their commitments directly (normally their commitments are paid over time). So from now on, the GP earns 2% a year on the 100 million.

After 10 years of investing, all assets are sold and the fund is closed. Let's assume the fund could double the money invested and is now worth 200 million. 

Now the GP pays back the 100 Million € invested by the LPs and himself. Of the remaining earnings of 100 million, the GP takes his 20% carry and now distributes the remaining 80 million to investors.

Learn more about how funds earn returns and distribute them here.

Overview of a potential LP-Structure

Special Entities

This is the basic structure of funds operating in Germany. In addition, there are other entities that could be part of this structure:

  • The ABC Trust GmbH: Some investors prefer to remain anonymous and don't want to invest directly in ABC Fund KG. To provide anonymity to these investors, funds may offer an ABC Trust GmbH.
  • The Feeder KG: When US investors want to invest in a fund, it's a good idea to have a Feeder KG in between. This way, GPs can avoid some of the extra paperwork that comes with the special rules for US investors. If a US investor were to invest directly into the ABC Fund KG, all other investors would also have to comply with these regulations. To make things easier, the Feeder KG was created.

This structure has evolved over the last 20 years and shows how smart legal strategies can lead to optimal results. But it also creates additional challenges. That's where Vestlane comes in to help GPs raise their fund.

How does Vestlane help?

Funds must comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. Just like opening a bank account, you need to identify each investor and then perform the appropriate due diligence. With potentially hundreds of LPs, a GP team and additional entities such as the Trust or Feeder KG, it can be challenging to fully comply with German and European KYC and AML standards.

Our tool provides a fully digital investor onboarding process that is scalable and 100% compliant with the highest KYC and AML standards – right out of the box. Manage onboarding yourself or invite your service providers and legal partners into your shared workspace, making their jobs easier and saving yourself money on legal fees.

If you want to know more about Vestlane, check out our solutions!

Similar posts

Start your 14-day free trial

Automate campaign management.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
No credit card required
Cancel anytime