Evaluating GP performance: Warning signs and proactive solutions
General Partners (GPs) play a critical role in the success of private capital funds. They are responsible for managing investments, driving returns and ensuring alignment with Limited Partners (LPs). However, underperformance, misalignment or governance issues can risk LPs’ capital.
Proactively evaluating GP performance and addressing red flags early on is crucial for LPs to protect their interests and maximise returns. In this article we outline the key metrics, warning signs and actionable strategies for addressing GP underperformance.
We consider the key metrics for evaluating a fund manager’s (GP) performance to be:
- Investment Performance: Measures such as IRR , MOIC , DPI , RVPI and TVPI which can be benchmarked against peer funds/ industry averages to assess relative performance
- Portfolio Quality: focusing on diversification, risk exposure and the GP’s ability to generate increased value through operational improvements at the portfolio company level to deliver successful strategic exits
- Capital Deployment: is capital deployed efficiently within agreed timelines, balancing speed with appropriate due diligence? Delays may indicate pipeline or execution risks, while overconcentration in certain assets can indicate inefficiencies and erode risk-adjusted returns
- Alignment & Governance: low GP co-investment and high management fees (uncapped or exceeding reasonable costs) or weak clawback provisions (e.g. no escrow, limited liability) can create misalignment between GPs and LPs and reduce fund performance
- Transparency and Reporting: High-quality GPs provide clear, timely, and comprehensive updates, including financial performance, investment strategies, and market outlooks
[1] Internal Rate of Return
[1] Multiples on Invested Capital
[1] Distribution to Paid-In Capital
[1] Residual Value to Paid-In Capital
[1] Total Value to Paid-in Capital
