Limited partnership agreements are popular for different types of investment pools. Hedge funds, private equity funds and venture capital funds typically structure each fund in an LP to allow sponsors to make passive investments in the fund, while general partners make investments and are remunerated. The sponsorship agreement is the management document for venture capital funds. Find out how limited partnerships work and whether your business should be a business. Buffett recommended that his clients invest with his Colombian classmate Bill Ruane – not because he was the best investor Buffett knew next to him, but because Buffett considered him a man of great integrity and moral character (remember most of Buffett`s sponsors, where his family and close friends were). According to Buffett, Ruane was “the money manager in [his] knowledge, which is the highest in the combination of integrity, capacity and continuous availability factors for all partners.” In the late 1950s and early 1960s, Buffett created additional partnerships to manage money. As biggest Names on Wall Street dominated the headlines, Buffett beat the market in silence from his Home Office in the heart of America. In his thirties, he was a millionaire. But there is another reason Why Buffett does this, and that is because of his integrity.
Throughout the buffett partnership saga, you can see how Buffett acted with integrity towards his sponsors, and how he acted with integrity in terms of investment strategy – he wasn`t ready to try a new unproven method simply because he found it increasingly difficult to pursue his proven approach. He even entered into the partnership because he refused to gamble money with his LPs, when he could have continued for at least a few years. After all, at the end of the partnership, Buffett even chose a new fund manager for his partners – not on the basis of his CV or IQ – but on the basis of his moral character. And yet, in May 1969, Warren Buffett announced to his commando that he was entering into the Buffett partnership. A limited partnership allows you to enter into a contract with investors, so that your participation in the investment will be passive. Even as his partnerships grew, Buffett worked with a limited capital base. Although several million dollars in the early 1960s were much more money than today, it was still small enough to function as a single investor today in deep and net net stock value. The same is true for traditional hedge funds such as Warren Buffett and real estate partnerships, venture capital funds and private equity funds. Limited partners simply do not have the know-how to analyze the projected finances of a real estate complex or to know the business knowledge of a startup.
If you`re a start-up founder, you may never need to create a limited partnership, but if you ever want to manage a venture capital fund or invest in real estate for different contacts, the limited partnership structure is the best way. And when you`re trading venture capital funds, there`s never any harm in understanding as much as you can.