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Optimal Carried Interest: Adverse Selection in Islamic and Conventional Venture Capital and Private-Equity Funds

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  • Meryem Mehri
  • M. Kabir Hassan
  • Kaouther Jouaber-Snoussi

Abstract

In an optimal carried interest model with adverse selection, the optimal profit-loss sharing ratio (PSR) explains how the risk aversion of the two parties can affect their bargaining powers by allowing investors to detect the true risk aversion of fund managers and not their true skills. The higher the management fee, the higher is the PSR. Our simulation exercise shows that when the fund manager is more risk averse than the investor for a higher invested capital and weaker expected net profit, the optimal negotiated profit-sharing ratio will be higher.

Suggested Citation

  • Meryem Mehri & M. Kabir Hassan & Kaouther Jouaber-Snoussi, 2017. "Optimal Carried Interest: Adverse Selection in Islamic and Conventional Venture Capital and Private-Equity Funds," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(7), pages 1458-1476, July.
    • Handle: RePEc:mes:emfitr:v:53:y:2017:i:7:p:1458-1476
    DOI: 10.1080/1540496X.2016.1166424
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