Conflicts of interest are inherent in investment management, and private equity presents its own unique set of challenges. General Partners (GPs), who manage private equity funds, are responsible for acting in the best interests of their investors (Limited Partners, or LPs). Yet, given their position, GPs can often find themselves facing dual obligations—managing investor capital while pursuing activities that may conflict with that responsibility.
For investors, understanding how these conflicts arise—and how they should be managed—is essential.
Disclosure vs. Oversight
The starting point for identifying conflicts is in the fund’s offering documents, such as the Limited Partnership Agreement (LPA). These documents typically disclose potential conflicts of interest. However, disclosure alone does not make such conflicts acceptable. GPs must manage and mitigate conflicts, often with oversight from the Limited Partner Advisory Committee (LPAC) and the firm’s compliance function. Compliance should not only record conflicts but also provide guidance on how they are addressed in practice.
Common Conflicts in Private Equity
- Pre-Existing GP Interests
A frequent issue arises when GPs or their affiliates already hold stakes in a portfolio company under consideration for investment. These holdings may create conflicts due to:
- Liquidity preferences – A GP with a personal investment may prefer to exit sooner than the fund should.
- Voting rights – Earlier investments may grant superior rights compared to the fund’s holdings.
- Different investment terms – The fund might buy in at a discount while the GP’s personal investment could be at a loss, creating incentives misaligned with LPs.
Some funds explicitly limit GP holdings to prevent such conflicts (e.g., no investment in companies where the GP owns more than £100,000 or 10% of shares).
- Direct GP Investments
GPs may wish to invest personally in opportunities. While not inherently problematic, GPs must prioritize their fiduciary duty to investors. “Cherry-picking” the best deals for themselves ahead of the fund would be inequitable. Some funds require LPAC consultation before a GP can make personal investments.
- Personal Trading and Insider Risks
Two key risks arise here:
- Front running – Employees using knowledge of fund trades to profit personally.
- Material non-public information (MNPI) – Employees trading on insider information.
To mitigate these risks, funds typically adopt personal account dealing policies, which may include:
- Restricted lists of securities employees cannot trade.
- Pre-clearance requirements for personal trades.
- Post-trade checks / monitoring against brokerage statements.
- Minimum holding periods for employee trades.
- Penalties for repeated violations.
- Related-Party Transactions
Conflicts also occur when funds managed by the same GP trade assets with one another. For example, Fund A might sell an asset at a discount to Fund B, enriching one set of investors at the expense of another. To reduce this risk, offering documents often outline strict pricing mechanisms, and LPAC approval is usually required.
- Deal Allocation
When GPs manage multiple funds, they must decide how to allocate investment opportunities. Allocation can be based on:
- Pro-rata basis – Proportional to fund size.
- Strategy fit – Allocating deals to funds with the most relevant mandate (e.g., healthcare vs. fintech).
Clear policies and transparency are critical to ensure fairness among funds.
- Placement Agents
GPs often work with third-party placement agents to raise capital. While these agents expand investor access, they also create conflicts:
- Agents are incentivized by fees to promote a GP’s fund.
- In some cases, the costs of using agents are charged to the fund itself, reducing investor returns.
Transparency is key—investors must be informed when placement agents are involved and how their costs are allocated.
Managing Conflicts: Best Practices
- Robust disclosures in fund documents.
- LPAC oversight for related-party deals, direct investments, and major conflicts.
- Compliance monitoring of personal trading, valuation, and allocations.
- Independent governance (valuation committees, external consultants, administrators).
- Culture of integrity, ensuring fiduciary duties are prioritized over personal gain.
Conclusion
Conflicts of interest are an unavoidable reality in private equity, but they need not erode investor trust. Through transparency, oversight, and strong compliance practices, GPs can manage conflicts fairly and uphold their fiduciary duty. For LPs, understanding how conflicts arise—and how they are addressed—remains critical when evaluating fund managers and their governance practices.
