Why is it important to align interests between GPs and LPs?

Aligning the interests between General Partners (GPs) and Limited Partners (LPs) is crucial for establishing a foundation of trust and collaboration in private capital partnerships. When both parties share common goals and incentives, it fosters an environment where GPs are motivated to act in the best interest of LPs, leading to better investment decisions and overall performance of the fund.

The relationship is inherently a partnership, where GPs are the active managers and LPs are the investors. If their interests are not aligned, it can lead to conflicts that ultimately jeopardize the fund’s performance and the trust between the parties. For example, GPs might prioritize short-term gains to increase their fees, rather than focusing on the long-term sustainability and growth that LPs typically desire. Therefore, a strong alignment of interests helps create a cooperative dynamic that can enhance both investment outcomes and the integrity of the partnership.

The other options do not encapsulate the primary reason for aligning interests. While minimizing operational costs and maximizing individual profits can be beneficial, they do not address the fundamental need for trust and collaboration that underpins a successful partnership. Similarly, creating additional funds, while a potential outcome of a positive relationship, is not the core reason for alignment in interests between GPs and