Abstract

It is standard practice for private equity general partners (GPs) to commit capital to a fund
alongside limited partners (LPs). Despite the ubiquity of the practice, and the belief that it
aligns GP-LP incentives, there is almost no large-sample empirical analysis of GP commitments.
In this analysis, we seek to fill the gap in research by examining the relation between GP
commitments and fund performance for a sample of 1,503 private equity funds over a period
of more than 20 years. We find that fund performance is positively associated with the amount
of GP commitment for levels up to about 10% of committed capital. For example, moving from
a GP Commitment of 2.2% (the 25th percentile) to 4.4% (the 75th percentile) is associated with
an increase in IRR of about 1.5%. However, for very high levels of GP commitment the positive
relation moderates. This finding is consistent with a trade-off between GP-LP incentive alignment
and GP risk-aversion that results in an optimal GP commitment percentage in the range
of 10-13% (depending on fund characteristics) which is substantially higher than the average
commitment rate of 3.5%. Optimal GP commitment percentages are slightly lower for venture
capital / growth equity funds than buyout funds, but still substantially larger than observed
average commitments.

Authors

Gregory Brown, UNC Kenan-Flagler Business School
William Volckmann, Institute for Private Capital