ILPA cautions private equity sponsors against over-reliance on tiered carry structures in secondaries transactions, warning that poorly designed compensation frameworks could undermine investor alignment and pricing stability. While tiered carry is widely adopted to align sponsor and buyer interests by tying secondary returns to primary fund performance, the influential investor group stresses that compensation should be carefully negotiated with primary fund investor committees to prevent unintended conflicts. Sponsors must balance the incentive benefits of tiered carry against the risk of creating unsustainable pricing expectations that could deter future secondary deals and erode fund values.

Market implications include potential tightening of compensation terms across the secondaries sector, which may reduce sponsor margins but could enhance long-term investor confidence. The ILPA's warning reflects broader concerns about compensation transparency and alignment in private equity, where secondary market dynamics increasingly influence primary fund valuations and fundraising. This development suggests sponsors may face greater scrutiny from institutional investors when structuring secondary transactions, potentially leading to more standardized compensation practices.

Concrete action for sponsors involves proactively engaging primary fund investors in compensation discussions before finalizing secondary deals, ensuring tiered carry structures are both motivating and sustainable. The ILPA's caution serves as a timely reminder that while tiered carry can optimize returns, it must be implemented with rigorous governance to maintain the delicate balance between sponsor incentives and investor alignment.