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Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

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  • Robinson, David T.

    (Duke University)

  • Sensoy, Berk A.

    (OH State University)

Abstract

Using a new database of the compensation terms, ownership structures (capital commitments), and quarterly cash flows for a large sample of buyout and venture capital private equity funds from 1984-2010, we investigate the determinants of manager compensation and ownership and how these contract terms relate to the funds' cash flow performance. Market conditions during fundraising are an important driver of compensation, as pay rises and shifts to fixed components during fundraising booms. We find no evidence that higher compensation or lower managerial ownership are associated with worse net-of-fee performance, in stark contrast to other asset management settings. Instead, compensation is largely unrelated to net cash flow performance. Our evidence is most consistent with an equilibrium in which compensation terms reflect agency concerns and the productivity of manager skills, and in which managers with higher compensation earn back their pay by delivering higher gross performance.

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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2011-14.

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Date of creation: Jul 2011
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Handle: RePEc:ecl:ohidic:2011-14

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  1. Ji-Woong Chung & Berk A. Sensoy & Léa Stern & Michael S. Weisbach, 2012. "Pay for Performance from Future Fund Flows: The Case of Private Equity," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3259-3304.
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  8. Robinson, David T. & Sensoy, Berk A., 2010. "Private Equity in the 21st Century: Cash Flows, Performance, and Contract Terms from 1984-2010," Working Paper Series 2010-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  9. Vikas Agarwal & Naveen D. Daniel & Narayan Y. Naik, 2009. "Role of Managerial Incentives and Discretion in Hedge Fund Performance," Journal of Finance, American Finance Association, vol. 64(5), pages 2221-2256, October.
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Cited by:
  1. David T. Robinson & Berk A. Sensoy, 2011. "Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity," NBER Working Papers 17428, National Bureau of Economic Research, Inc.

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