Aligning Incentives and Mastering Strategy in Private Markets

Game Theory for LPs

In the high-stakes world of private markets, Limited Partners (LPs)—the institutional investors, family offices, and high-net-worth individuals who invest in private equity, venture capital, and other alternative assets—face a complex web of decisions. From choosing which funds to back to negotiating terms with General Partners (GPs) and navigating competitive dynamics, LPs must constantly balance risk, reward, and relationships.

But what if there was a framework to help LPs make smarter, more strategic decisions? Enter game theory, the study of strategic interactions where the outcome for one participant depends on the actions of others. By applying game theory to their decision-making, LPs can gain valuable insights into how to navigate the challenges and opportunities of private markets.

In this blog post, we’ll introduce the concept of game theory and dive into its first major application for LPs: the Principal-Agent Problem. We’ll explore how LPs can align incentives with GPs, reduce information asymmetry, and build stronger partnerships for long-term success.