Module IV· Interview EssentialsIntermediate
Question
What is an 'alignment-of-interest' discussion in LP due diligence?
Answer
What
Alignment of interest describes how closely the interests of the GP and the LP overlap. Four main dimensions:
- GP commitment: how much of the fund commitment does the GP itself provide? Minimum standard 1–2%, best-in-class 3–5%.
- Management fee structure: 2% on committed capital, later reduced to net invested capital (1.5–1.75%).
- Carry waterfall: European whole-fund is LP-friendlier than American deal-by-deal.
- Transaction fee offset: best practice: 100% offset against the management fee.
Deep diveShow more details
Other alignment dimensions
| Dimension | Description |
|---|---|
| GP removal rights | Can LPs replace the GP for underperformance? Threshold typically 75% LP vote for cause, 90%+ for no cause |
| Successor fund clause | When may the GP raise Fund III (typically only after 70–80% of Fund II is invested) |
| Conflicts policy | How conflicts are handled (cross-fund investments, fund-to-fund transactions) |
| LPAC composition | Who sits on the Limited Partner Advisory Committee, which veto rights |
Top-quartile sponsor standards
GP commitment 3–5%, 100% transaction-fee offset, European whole-fund carry, a clear conflicts policy with LPAC approval, strict successor-fund thresholds. A leading sponsor might commit ~5% of the fund's total commitment, for example — that is the benchmark for top quartile.
Pitch tip
In the interview this is a typical LP due-diligence topic. Mentioning the ILPA standards (Institutional Limited Partners Association) earns bonus points — the ILPA best-practice guidelines define the industry-default standards for alignment-of-interest clauses.