From Beer & Quiche to Private Debt: The Signaling Game in Manager Selection

Personal Insights and Perspectives on the Evolving World of Private Credit

In private debt, perception shapes reality. First impressions influence how LPs evaluate GPs, but as we explored in Mind the Gap, those first impressions can be misleading. In a competitive fundraising environment, GPs craft narratives, highlight strengths, and strategically position themselves in the market to send signals that attract LP capital. But how do LPs separate meaningful signals from mere noise?

Game theory provides a useful concept to understand the true challenge in this question. In economics, signaling games describe interactions where one party (the sender) holds more information than the other (the receiver). The sender’s goal is to convince the receiver of a particular reality—whether or not that reality is accurate. In private markets, GPs are the senders, and LPs must interpret their signals with care. One famous example I remember from my time at Game Theory classes is the Beer-Quiche Game (Cho & Kreps, 1987).

In today’s article, we will explore the economics of signaling, how it applies to manager selection, and the types of signals that LPs should ignore before making an allocation decision.

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The Economics of Signaling Games

In game theory, an important class of games of imperfect information involves an interaction between a more informed agent (the sender) and a less informed agent (the receiver). When the sender moves first, the game is called a signaling game. These games are defined by the possibility that the sender’s action conveys information about their “type” to the receiver.

Two fundamental types of equilibria arise in these settings: Pooling Equilibrium and Separating Equilibrium. A Pooling Equilibrium occurs when different types of senders choose the same signal, making it impossible for the receiver to distinguish between them. In this case, the receiver cannot update their beliefs based on the sender’s actions because all types behave identically. A Separating Equilibrium occurs when different types of senders choose different signals, allowing the receiver to correctly infer their type based on observed actions.

A classic example of signaling is Spence’s job market model (1973), where job applicants (senders) have different skill levels, but employers (receivers) cannot observe them directly - creating imperfect information. To signal high productivity, applicants pursue costly signals like higher education. If obtaining a degree is significantly harder for low-skill workers, it serves as a separating signal, allowing employers to distinguish between strong and weak candidate types. An even more illustrative example is the Beer-Quiche Game (Cho & Kreps, 1987) – obviously based on stereotypes - , where a sender (a potentially tough individual) chooses between beer or quiche, while the receiver (an opponent) must decide whether to challenge or not. If only tough individuals prefer beer, the act of choosing beer signals toughness, influencing the receiver’s decision.

In private debt manager selection, LPs face a similar challenge: identifying which signals—like GP sponsor-investment, fund size, total AuM, or industry awards—truly indicate quality versus cheap talk marketing. Just as drinking beer in the game signals toughness, LPs must separate credible indicators from strategic posturing.

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Application to Manager Selection: Decoding GP Signals

In private credit, managers send signals to demonstrate their quality, stability, and track record. However, not all signals are equally informative. Let’s break down some common signals used in manager selection and analyze their credibility.

Top Quartile?

“Top quartile performance” is a favorite GP marketing tool, but how credible is it? Benchmarks vary widely, and survivorship bias, vintage-year adjustments, and selective reporting often distort rankings. Since we are operating in a market with private information, we also can′t include risk levels etc. to the benchmarks. From a signaling perspective, pooling equilibria emerge when both strong and weak GPs claim top-quartile status because there’s little cost to doing so. A separating equilibrium would require top performers to credibly signal superior returns and distinguish themselves from low performers. Change the game - LPs should look beyond headline figures and demand deal-level data to separate reality from marketing. Without transparency, top quartile is just another pooled signal—more noise than insight.

Years in the Industry as a Team

LPs value experience, but longevity alone doesn’t guarantee strong team dynamics. Many GPs highlight collective years in the industry, but does that reflect a stable, cohesive team or just a collection of impressive résumés? High turnover, especially among key professionals, can signal instability or misalignment. From a signaling perspective, stable teams create a separating equilibrium, proving long-term commitment, while high-churn firms fall into a pooling equilibrium, masking instability. LPs should focus on how long the core team has worked together—not just the total years of experience. A credible signal? Yes, but only if tenure reflects true cohesion and execution across cycles.

Conference Sponsorships & Industry Awards

Industry conferences and awards enhance visibility, but do they signal real GP quality? Many GPs invest heavily in conference sponsorships, creating pooling equilibria, where both strong and weak managers appear similar – in case strong GPs really invest in sponsorings. True differentiation – a separating equilibrium - requires signals that weaker GPs can’t easily replicate, such as awards based on rigorous, performance-driven criteria rather than self-nominations or pay-to-play structures. ?LPs should scrutinize how awards are granted, whether conference speaking roles are merit-based, and if the insights shared are truly proprietary or just marketing narratives. Interestingly, some of the strongest GPs avoid costly conferences altogether, further complicating LPs’ interpretation of these signals. Without clear differentiators, industry presence alone does little to assess actual skill. In reality, sending the costly signal “conference sponsoring” might end up in a separating equilibrium where strong GPs don′t sponsor while weak GPs do – therefore this signal is meaningless for LPs.

LP Re-Ups, AuM Growth & Churn

High LP re-up rates are often marketed as a sign of confidence, but what about the LPs who don’t return? A strong re-up rate alone doesn’t tell the full story—LP churn is just as critical. Some GPs quietly replace exiting investors with new ones, masking underlying issues while keeping re-up figures artificially high. In pooling equilibria, both strong and struggling GPs may present similar re-up statistics, making it difficult to distinguish between genuine investor loyalty and strategic LP turnover. Also we could discuss whether LP Re-Up is a signal at all – sometimes Re-Ups are not challenging current developments at all, which creates login effects. A separating equilibrium emerges when LPs analyze who stays, who leaves, and why—focusing on whether core, long-term LPs remain committed across multiple vintages or if there’s a quiet shift in the investor base. A credible signal? Yes, but only if LPs look beyond headline retention figures and examine the true stability and composition of investor commitments.

GP-Sponsor & Team Investments

GP and team investments are often framed as a signal of alignment, but not all commitments carry the same weight. Some GPs highlight substantial co-investment, yet LPs must assess where the money comes from—is it personally funded, or merely structured through fund-level financing, fee waivers, or deferred bonuses? In a pooling equilibrium, both aligned and misaligned GPs appear similar, making it difficult to identify true commitment. A separating equilibrium emerges when LPs dig deeper, focusing on who is taking real financial risk. A declining GP commitment as fund sizes grow could indicate shifting priorities, reducing alignment with LPs. A credible signal? Only when investments are personally funded, meaningful relative to AUM, and remain consistent across fund vintages.

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Closing Thoughts: Separating Signal from Noise

Just as beer or quiche signals toughness or weakness in game theory, GPs strategically shape their image in private debt fundraising. The challenge for LPs is to separate real indicators of quality from polished marketing narratives. Without careful scrutiny, pooling equilibria blur the lines between strong and weak managers, making it harder to distinguish genuine alignment from optics. It is key understanding the game and then selecting the right signals with precision.

This is why LPs must demand more than surface-level validation—whether it's top-quartile returns, fund size, or industry awards. The key to breaking through the noise is identifying and understanding separating equilibria, where only truly strong managers can sustain their signals. That means pushing for deal-level performance data, meaningful GP commitments, and consistent LP backing rather than relying on self-reported statistics.

Next week in Private Debt Diaries, we’ll explore The Risks of Evergreen Structures—examining liquidity, investor psychology, and the potential for bank-run dynamics in private credit. Stay tuned!

#PrivateDebt #ManagerSelection #PrivateCredit #InstitutionalInvesting #DueDiligence #PrivateDebtInvestor #SignalingGames #LPFocus #Fundraising #AlternativeInvestments #PrivateMarkets

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About Private Debt Diaries

Private Debt Diaries is a series offering personal insights and actionable strategies to navigate the evolving private credit landscape. Drawing from my experience as a private debt specialist, this series connects market trends, theoretical concepts, and practical decision-making to empower LPs and private market professionals.

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Disclaimer

The views expressed in this series are solely my own and do not represent any organization I am affiliated with. This content is for informational purposes only and does not constitute financial or investment advice. While I strive for accuracy, no guarantees are made regarding the completeness or reliability of the information. Readers should consult a professional before making any investment decisions.