Why Governance Matters in Private Market Investing: What LPs Must Examine

The Evolving Landscape of Private Markets

Over the past decade, there has been a significant increase in private market investment. Private equity, private credit, hedge funds and real estate were once a small side allocation; today they are core holdings. Low interest rates, companies staying private for longer, and banks pulling back from corporate lending drove the shift. As allocations have grown, governance has become a main risk control rather than a form filled in at the start.

Unlike public markets, which rely on continuous mark-to-market pricing, daily liquidity, and standardized public filings, private markets inherently operate under deep information asymmetry. Limited Partners (LPs) do not have the luxury of real-time market signals or aggressive external regulatory oversight; instead, they must rely almost entirely on the internal operational integrity and fiduciary discipline of the General Partner (GP).

At Blue Ocean Capital Advisors, a governance review is a way of protecting returns and not just as paperwork. For every private market allocation, we do a detailed due diligence to test whether the manager’s controls are sound and its interests are genuinely aligned with the investors before any capital is committed.

Core Pillars of GP Governance: What Investors Should Examine

When conducting operational due diligence, investors must evaluate four structural pillars that dictate how a GP makes decisions, values assets, resolves internal conflicts, and allocates costs.

Pillar 1: Institutional Controls, LPAC Governance & GP Alignment

• Investment Committee (IC) Governance: Evaluate IC composition, voting thresholds, veto rights, and the independence of external advisors.
• Decision-Maker Background Checks: Conduct deep-dive background checks on key decision-makers across multiple historical market cycles.
• LPAC Charter Strength: Ensure the Limited Partner Advisory Committee has formal voting power, an explicit conflict resolution mandate, and a regular meeting cadence.
• Key Person Protections: Verify clear key person departure triggers, substitution timelines, and executive turnover tracking.
• GP Commitment: Verify that the GP’s “skin in the game” consists of genuine upfront cash capital rather than management fee foregone, salary waivers, or administrative discounts.
• Long-Term Vesting: Confirm that carried interest vests over multiple years, keeping deal teams economically tied to outcomes they underwrote.

Pillar 2: Valuation Methodology & Transparency

• Independent Valuation Oversight: Assess the frequency of third-party valuations and the scope of independent audit firm oversight.
• Valuation Consistency: Ensure strict continuity in valuation methodology across changing economic environments rather than formulas that shift with conditions. Watch for sudden markups, or delayed write-downs of impaired assets, used to maintain reported performance.
• Distribution Pricing Policies: Establish fair value policies for in-specie distributions of securities, including pricing spread across multi-day trading windows.

Pillar 3: Conflict Management & Related-Party Transactions

• Co-Investment & Deal Allocation: Screen for transparent, documented rules for allocating deals across the main fund, parallel vehicles, and co-investors.
• Continuation Vehicles & Cross-Fund Transfers: Where a GP sells an asset to a vehicle it also manages — a continuation fund, a successor fund, or a parallel strategy — mandate LPAC review, independent valuation, and third-party pricing before the transaction closes.
• Conflict Disclosure & LPAC Approval: Ensure all material related-party transactions are disclosed to, and approved by, the LPAC in advance rather than reported after the fact.
• Service Provider Independence: Confirm that the administrator, the custodian and — for strategies using leverage or securities financing — the prime broker are independent of the GP and of one another, with client assets fully segregated. A manager that values, holds, and reports on its own assets has no external check.
• Affiliated Service Provider Self-Dealing: Screen for affiliated consulting, recruiting, or technology businesses charging fees to portfolio companies without a corresponding offset to LPs.

Pillar 4: Fee Transparency, Expense Allocation, Leverage & Structural Considerations

• Fee Offset Arrangements: Assess the fees charged by GP (transaction fee, director fee, advisory fee etc), and check how those fees are offset against LP management fees.
• Organisational Expense Caps: Inspect fund setup costs against contractual caps and audit the allocation of MFN negotiation costs.
• Banking Infrastructure & Wire Controls: Check for multi-bank relationships, multi-person signature authorisations, and strict cash handling controls.
• Fund-Level Leverage & Subscription Lines: Assess any leverage taken by the fund, including subscription lines of credit. Confirm that the purpose is cash-flow management rather than return enhancement, review the terms on which portfolio assets may be encumbered via NAV loans.
• Structural & Tax Efficiency: Assess the tax consequences of participating in each opportunity through the fund’s structure, and the effect that structure may create on the net performance ultimately delivered to LPs.

Conclusion & Strategic Outlook

Governance is not a box to tick. It is one of the main things protecting the returns LPs actually receive, which is why we test all four pillars before committing capital: who makes the decisions, how assets are valued, how conflicts are handled, and what LPs are charged.

Three changes make this more important, not less. Continuation funds and GP-led secondaries are now a normal exit route, putting the manager on both sides of the deal far more often. Borrowing has moved from individual assets up to the fund itself — through subscription lines as well as NAV facilities — where it is harder to see and its effect on reported returns easier to miss. And extended holding periods mean that valuation policy, rather than realization, drives most of what an LP sees in any given year.

In each case, the only protection an LP has is what was agreed before signing. A governance review does not end at commitment — it defines the terms an LP will live with for the life of the fund.