Two Sponsor Conflicts of Interest Most LPs Never Check

An experienced LP reviews deals differently than someone investing in their first syndication.

While new investors tend to focus on surface-level metrics like the deal’s return or maybe the sponsor’s track record, veteran LPs quickly dive a level deeper. And a question I often get in these types of discussions is: “how do I know we’re aligned?”

The conversation that follows is almost always the same. “What’s the acquisition fee?” “Is there an ongoing asset management fee?” “How much do you get paid before I see returns?”

All fair questions. Fees pay for the work of finding and running the deal, and I’ve written before about how to tell a reasonable fee structure from one that’s lopsided.

But in all of those conversations, fees are the only “alignment” item that ever comes up.

Being aligned means more than just a reasonable fee structure – it also means the sponsor’s interests don’t split from yours elsewhere in the deal. There are two specific conflicts of interest to always look for…and they’re easy to miss, especially when fees get all the attention.

When the sponsor is on both sides of the table

Many sponsors own other companies the deal does business with. And when someone sits on both sides of a transaction, they can often set the terms for both unilaterally and help ensure that at least one of their sides comes out a winner.

A common version is an affiliated construction management company. It handles rehab and/or new construction for a deal, and typically gets paid a fee for doing so. Because it’s simply a service provider, it has no “skin in the game” of the deal itself – so whether the deal’s business plan works is irrelevant to this company. They get paid their fee (which usually comes from investor money) and move on.

None of this is typically hidden. Nearly every PPM has a section titled “Conflicts of Interest,” and that’s where these relationships are disclosed. But it’s written by securities attorneys, in language meant to protect the sponsor, and most investors skip right over it.

In fairness, there are legitimate reasons to use an affiliated company as a service provider – providing the service below market rate is a big one. So for every affiliated company in the PPM, ask the sponsor what it charges and whether an unaffiliated firm will bid on the same work.

Is the sponsor doing this to ultimately help improve the investor outcomes on the deal? Or simply using investor dollars to line the pockets of another one of their companies?

Why the sponsor is doing the deal at all

Syndication sponsors get paid in three ways:

• At closing (acquisition fee, loan guarantor fee, due diligence fee, etc.)
• During the hold (asset management fee and/or a share of the operating cash flow)
• At exit (their carry / promote)

So if a sponsor hasn’t done many deals, or if a lot of their deals are underwater, often the only way for them to keep the lights on is to do more deals (and earn more upfront fees). This creates a pressure to do deals that may not be in the best interest of LPs.

Multifamily deal flow slowed from 2023 through 2025. Yet some sponsors kept bringing new deals to their investors at the same pace they had during the boom years, even as several of their older deals sat underwater.

I’m not saying those newer deals were bad…they may have been just fine. But it’s hard to look at that pattern and not conclude that earning more fees was how they were making payroll.

The fund-of-funds space is another example. A fund-of-funds manager’s up-front income is usually an acquisition or due diligence fee, paid to them before the deal has done anything for investors. Often, if they aren’t raising money, they aren’t getting paid…so the pressure is constant.

No deal document discloses any of this.

So it’s fair to ask: How many deals do you do a year, and why that number? What happens to your business in a year when you don’t buy anything?

A better version of the alignment conversation

Fees are a critical part of GP/LP alignment – they’re just the easy part because they’re unambiguous, written down in plain numbers.

So the next time you have the alignment conversation with a sponsor, treat the fee answer as a starting point. A sponsor with a perfectly reasonable fee structure can still be overpaying their own construction company with your capital, or buying the deal because payroll is due.

And if the conversation stops at fees, you’d have no way of knowing.