Alignment of Interests
Alignment of interests is how fund economics and controls ensure GP decisions benefit LP outcomes over the life of a strategy.
Allocator relevance: A primary diligence lens for predicting behavior in both upside and drawdown environments.
Expanded Definition
Alignment is created through a combination of economic incentives (fees, carry, GP commitment), structural safeguards (clawbacks, expense policies), and governance mechanisms (LPAC oversight, transparency standards). A manager can market “alignment,” but allocators look for enforceable terms and observable discipline.
Misalignment often shows up as incentives that reward asset gathering over performance, unclear expense allocations, weak clawback mechanics, or governance structures that limit LP visibility when conditions deteriorate.
How It Works in Practice
Allocators model net outcomes under multiple scenarios, review LPA and side letter provisions, and compare terms against peers. They also test “behavioral alignment” by looking at portfolio construction discipline, write-down timing, and how the manager communicates bad news.
Decision Authority and Governance
Alignment depends on who controls key decisions: allocations, valuation policy, recycling, follow-on reserves, and conflict resolution. Strong LP protections typically require both contractual clarity and a governance process that functions under pressure.
Common Misconceptions
- Lower fees automatically mean stronger alignment.
- GP ownership always guarantees alignment.
- Reporting frequency alone equals transparency.
Key Takeaways
- Alignment is economic + governance, not messaging.
- Downside terms (clawback, expenses, control rights) matter most.
- Compare terms as a system, not as isolated bullets.