Alignment of interest in private equity refers to the design of incentive structures and governance mechanisms that ensure the interests of Limited Partners (LPs)—the investors—and General Partners (GPs)—the fund managers—are meaningfully aligned throughout the life of the fund.

This alignment is essential in private equity, where GPs are entrusted with discretionary management of investor capital over long-term, illiquid investment horizons.

Common mechanisms to promote alignment include:

• GP co-investment (or GP commitment), where the GP invests their own capital alongside LPs to ensure they have “skin in the game”

• Carried interest, which links GP compensation to fund performance

• Preferred return (“hurdle rate”), which ensures LPs receive a minimum return before the GP shares in profits

• Clawback provisions and vesting schedules to discourage short-termism

Alignment of interest is often viewed through four dimensions:

• Economic alignment – ensuring financial incentives are shared appropriately

• Strategic alignment – aligning fund strategy with investor goals

• Operational alignment – transparency and communication on fund operations

• Value alignment – shared views on responsible investing, ESG, or impact

According to the Institutional Limited Partners Association (ILPA), alignment of interest is one of the three core principles of a successful private equity partnership, alongside governance and transparency. The ILPA Guidelines provide a widely recognised framework for evaluating and negotiating alignment structures.