Deferred Conviction: The Illusion of Skin in the Game

GP commitments once signaled belief. Today, they’re often financed, waived, or deferred by fund managers raising ever-bigger funds. Is risked capital still part of the equation?

Today is a first for Cash and Carried: a co-authored piece.

It is with no other than the dynamic and gifted Anthony Hagan, whose writing from the perspective of an institutional investor has informed and inspired my own journey. I’m honored and grateful.

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As private equity funds grow larger, the required GP commitment (the cash a manager puts up alongside the investor base) scales with them. Yet many fund managers haven’t received liquidity from prior funds to meet those commitments in cash. This raises the question: if the GP can’t contribute real capital, why is the next fund being raised at all?

Before we get into the heart of our reflections, let’s briefly revisit the basics.

A private fund is a pooled investment vehicle—typically a private equity, venture capital, or private credit fund—not offered to the public. These funds rely on legal exemptions under the Investment Company Act of 1940 to avoid onerous regulations that their more regulated counterparts, such as mutual funds, are subject to.

They are able to qualify for these exemptions primarily because their investor base is restricted to investors that meet certain income, wealth, and investment holdings requirements, allowing the fund managers to pursue longer-term, higher-risk strategies.

Most of these “private” funds are structured as limited partnerships, where the General Partner (GP) manages the fund, and the Limited Partners (LPs) provide the capital. In return, the GP earns an annual management fee and a share of fund profits, called carried interest. To align incentives, the GP is expected to invest personal capital into each fund. This is known as the GP commitment, typically between 1% and 5% of total fund size.

In earlier decades, this worked cleanly. Smaller funds, faster exits, and real cash at stake. But as fund sizes have grown (from hundreds of millions to tens of billions) the cash commitment has ballooned, and distributions from prior funds are taking longer to arrive. The math gets tricky: a 2% commitment on a $20 billion fund means $400 million of GP capital, often before the GP has been paid out from the prior fund.

To fill the gap, GPs often rely on two tools:

1. Fee waivers, which convert management fees into profit interests without cash changing hands. This allows GPs to replicate the economic exposure of a cash commitment, without the actual cash. But it’s tricky, since there are tax-related implications here.

2. GP financing, where the firm borrows against future carry or firm equity to fund the obligation.

Inside firms, this commitment is often shared. Founders and managing partners typically contribute the bulk. Senior professionals may participate at lower levels. Junior investment staff sometimes get access through deferred comp or internal programs.

The commitment gets met. But increasingly, it is met on paper, rather than through real exposure.

Why Raise a New Fund?

To reiterate, the risk of economic exposure has become almost optional: through fee waivers and financing, GPs can meet obligations without putting up real capital, leaving true capital risk to the investor base. If the GP can’t contribute real cash, why is the next fund being raised at all?

The original theory behind the GP commitment was straightforward: skin in the game meant skin in the outcome. If you win, you win with the LPs. If you lose, you bleed too.

The GP commitment at some point hinders the viability of cyclical capital in the private markets. In this context, it is not an anchor of alignment. It is ballast. It introduces illiquidity into a relatively frictionless system. And when the goal is to manage capital across time, not just within a fund, that illiquidity becomes a problem to solve, not a virtue to signal.

So, the question is no longer whether GPs should commit capital. The question is whether the structure of private equity still requires it.

If the modern fund model is built less on capital at risk and more on linear capital stacking, alignment is no longer anchored in contribution, but in choreography: sequencing waivers and convincing the investor base that cash need not exchange hands for value to be generated.

The performance need not involve putting up cash, but in sustaining a belief that value can be created without it.

The GP commitment still exists, but increasingly as a formal placeholder, something contractually structured in or financed through external facilities. Rather than funded out of true risked capital.

Perhaps this evolution wasn’t as willful as skeptics may want to believe. Might we attribute an element of serendipity to it?

As fundraising has professionalized, the optics of alignment have become decoupled from its economics.

And so, the GP commitment becomes less a signal of belief, and more a cost of access. An official signal of alliance, not a bet on financial outcomes.

GP commitments look good on paper, and that’s the point. They live in pitch decks and LPAs not because GPs have the wherewithal to put skin in the game, but because they’re expected to.

In many cases, that expectation is fulfilled not with actual cash, but with optics: simulating belief, signaling alignment, and preserving reputation.

In a market still correcting for years of excess, that performance becomes even more valuable. Conviction becomes a narrative, not a check.

The narrative suggests a belief in a system that has thrived unlike any other, but not in a particular investment strategy. A belief that fundraising itself will continue. That momentum will cover illiquidity. That structure can substitute for sacrifice.

The GP Commitment was a bet that became a story. A story that requires no cash at all.