Most, but certainly not all, sponsors will have some of their own equity invested in a deal as well. In addition to GP (general partner) equity, they may also have LP (limited partner) equity invested. The degree to which a sponsor has equity invested in a deal is telling. It’s not the sheer dollar amount or percentage of equity that matters, per se. Instead, the equity should be sufficient enough to matter to the sponsor. For example, an institutional investor who puts $1 million into a $50 million deal may not be particularly pained if they were to lose some of this equity. A small investment firm, however, may not have as much equity to invest and therefore, if they invest the same $1 million may want to closely protect every penny.
Seeing that a sponsor has “sufficient” equity invested in a deal is a good way to ensure that a GP and LPs’ interests are aligned. In other words, the more meaningful the equity a sponsor has invested, the more skin in the game they have with any particular fund or transaction.