Is LP Compensation Structurally Misaligned?

Happy Thursday!

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Now, let’s get to it.

I recently wrote on LinkedIn, that LPs should get compensated based on their investment decisions, i.e. some form of carry.

Not because LPs need a handout - but because the fact they don't is one of the clearest signs of how underappreciated the LP role actually is.

LPs make decisions that only fully play out over 10+ years, but their compensation is reviewed and paid annually.

If incentives shape behavior, then this incentive system is clearly broken.

In this post, I'll walk through why this matters - from the marginal meetings that find outliers to what LP compensation actually looks like today, how carry could work in practice, and what the current structure really signals about how LPs are valued.

The Marginal Meeting Problem

First, let me tell you about one of the most uncomfortable hours of my LP career.

I was responsible for covering New England - my job was to know every mid-market GP in the region. I knew Boston and Providence in and out. Top-tier funds, emerging managers, the whole ecosystem. Which meant I was now meeting marginal GPs as well whenever I visited.

I reached out to a fund at the fringes of what we looked for. No clear signals this was special (in fact, mostly the opposite). But comprehensive coverage meant talking to everyone we couldn’t confidently rule out on paper (desktop screening) - even if the odds were low.

Two minutes in, I knew where this meeting was going.

They clearly didn't get many LP visits. They thought I was a $100M ticket who'd seen something special in them. Some hidden signal. A turnaround story.

I wasn't. I was simply doing my coverage job.

The next 58 minutes, I felt awkwardness Larry David could only dream of. Their hope, their enthusiasm and... their total lack of self-insight. At the end of the meeting, I opened our CRM and logged the E-rating - our internal short-hand for “never meet again”.

Side note: experiences like this are what made us obsess over low-friction coverage and meeting tracking when building FundFrame.

Out of a 100 marginal meetings, maybe only a handful are good... but that may just be the next Alpine or Veritas.

I like to tell myself I would have taken these meetings anyway.

But if I didn't have a carry incentive? I'm not sure I would have.

What LP Compensation Actually Looks Like

Most LP compensation follows the same pattern:

Notice what's missing? Any participation in the long-term outcomes.

The LP who sources the next top-decile fund gets the same comp as the one who keeps re-upping to the easy, mediocre relationships.

The LP who builds comprehensive territory coverage - and suffers through 100 marginal meetings to find 2 great ones - gets paid the same as the one who only takes warm intros.

The LP who does the harder work of backing an emerging manager? No upside.

Annual bonuses based on deployment reward activity, not outcomes. It’s the equivalent of paying a football scout for attending tryouts - not for finding the player who becomes a star five years later.

Munger said: "Show me the incentive and I'll show you the outcome." And right now, the outcome is optimized for deploying capital on schedule.

The Standard Response

The objection usually goes: "LPs don't take the same risk as GPs. They're salaried employees. Carry is for people with skin in the game."

Fine. Let's accept that.

But if you believe incentives shape behavior - and everyone in this industry claims they do (otherwise, why accept 20% carry?) - then you should also believe in some form of carry or carry-like structure for LPs.

Just make the upside smaller.

GPs get 20% because they're making concentrated bets with their own capital and reputation on the line.

LPs managing diversified portfolios? Meaningful participation - not GP-level, but enough that a great vintage materially changes your comp. Enough to align long-term decision-making with long-term outcomes.

How It Could Work

Structure LP carry programs around 3-year vintage portfolios - the way LPs actually work.

If you're doing both buyout and credit, split those up. Different risk profiles, different programs.

Track the vintage. Measure it against benchmark. Pay out carry on outperformance when the portfolio matures.

This aligns incentives with outcomes. LPs now care about 2035 performance, not just 2025 deployment. That marginal meeting that turned into a top-quartile fund? You get paid for it.

In action: Imagine an LP covering North American buyouts from 2025–2027. Those commitments form a vintage. Ten years later, if that vintage outperforms peers, a small share of that excess return is paid out to the team that made the decisions.

You reward exactly the behavior you want:

Deploy into better funds.
Get better outcomes.
Make more carry.

The institution wins. The LP wins. And decision quality improves.

What This Really Signals

The absence of long-term incentives for LPs isn't just a compensation issue.
It's a signal about how the industry views the role.

If you believed LP decision-making was genuinely difficult and value-creating, you'd pay for long-term outcomes.

If you believed territory coverage and relationship-building mattered, you'd reward the LPs who do it well.

If you believed sourcing the right GPs was as important as picking the right companies, you'd structure comp accordingly.

But most LP organizations don't. They pay LPs like administrators. As operators of a process, not owners of outcomes.

Some LP teams overcome this mismatch through sheer force of culture. However, there's always a latent risk those individuals realize they can get paid like owners elsewhere - and leave.

But in practice, this often leads to a familiar cycle: every four to five years, LP organizations roll out a new strategic plan meant to "sharpen focus" or "improve outcomes." But they never change the underlying incentive structure.

Strategy changes. Incentives don't. Behavior follows incentives.

The Bottom Line

I'm not arguing LPs deserve GP-level carry. Different risk, different role.

But zero long-term participation in the outcomes they create?

That's not a compensation philosophy. That's a statement about how little the industry values what LPs actually do.

And right now, the incentive is to deploy capital.

Is that really what we want?