GP Skin in the Game
1,503 funds and 20 years of data point to the GP commitment sweet spot š(spoiler: more isnāt always better)
Earlier this year, one of my school-aged kids came to me with what he thought was a brilliant idea. A diehard football fan, he felt very confident about the outcome of an upcoming game. His pitch? I place the bet with my money. If heās right, we split the winnings 50/50. If heās wrong, I eat the loss.
Needless to say, I passed (you wouldāve too).
And no, not just because sports betting is illegal. But because what he was proposing is a textbook example of misaligned incentives. The kid was attempting the oldest trick in the book: using OPM (other peopleās money) with no skin in the game.
Which brings us to private placements, where the same principle applies. When General Partners (GPs) invest their own capital alongside Limited Partners (LPs), it serves as a critical alignment mechanism.
Real money on the line = the GP believes in the strategy and is willing to bet on it (and not just with his momās dollars).
The data backs this up. Multiple studies show a clear pattern: fund performance improves when GPs have meaningful skin in the game. But thereās a catch: the benefit plateaus (and then diminishes) beyond a certain point.
Of course, no conversation about skin in the game would be complete without discussing the ways to sell the stakes:
So what does real āskin in the gameā look like? In this post, weāll discuss:
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Typical co-investment ranges
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What the data suggests is the optimal range
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Why a stated GP commitment isnāt always real skin in the game - and how tying up too much of a GPās net worth can create its own risks.
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What LPs should actually look for when evaluating GP alignment
On a somewhat related note, info on fees in REPE:
š Youāll find all sources and additional reading material at the end of the post.