The question of the GP commit (is it appropriate, how much should it be) is highly nuanced. For some GPs, 1% may feel immaterial. For others, it could require taking on a second mortgage. The concept of “skin in the game” can be defined as something far beyond the GP commit for emerging funds as well; “skin in the game” for those funds is all of the time and attention the GPs spend to ensure the success of their fund, opportunity cost for setting aside other endeavors, and reputational risk should the fund perform poorly. The conversation needs to evolve, not around whether the 1% GP commit is a reasonable standard, but whether a standard is reasonable at all.
Arguably, the GP commit to a fund should be what is appropriate and meaningful for the GP. The actual amount doesn’t determine “skin in the game,” but rather the significance of the commit to the individual GP. So long as the percentage demonstrates alignment with LPs and incentivizes a focus on responsible, thorough decision-making for the fund, it is reasonable. As a result, this may mean that the most prudent way for LPs to create meaningful and robust alignment with certain emerging GPs is to be comfortable with a 0% GP commit for the first (or more) fund(s), assuming the GP is comfortable with the personal tax implications.
On the flip side, the 1% may not be a large enough GP commitment to demonstrate adequate alignment and thus a higher percentage is warranted. In other words, it’s not a one-size-fits all standard, and should vary depending on the individual GPs. This also means that LPs need to start thinking in the long term and become willing to evolve with the funds in which they invest. As the GP raises more capital and grows increasingly wealthy over time, the expectation is that they increase their GP commitment. This feels like a far more reasonable and inclusive path, one that more LPs need to take now.
Courtney McCrea, based in San Francisco, and Sara Zulkosky, Washington, are co-founders and managing partners at Recast…