Pay for Performance from Future Fund Flows: The Case of Private Equity
AbstractLifetime incomes of private equity general partners are affected by their current funds’ performance through both carried interest profit sharing provisions, and also by the effect of the current fund’s performance on general partners’ abilities to raise capital for future funds. We present a learning-based framework for estimating the market-based pay for performance arising from future fundraising. For the typical first-time private equity fund, we estimate that implicit pay for performance from expected future fundraising is approximately the same order of magnitude as the explicit pay for performance general partners receive from carried interest in their current fund, implying that the performance-sensitive component of general partner revenue is about twice as large as commonly discussed. Consistent with the learning framework, we find that implicit pay for performance is stronger when managerial abilities are more scalable and weaker when current performance contains less new information about ability. Specifically, implicit pay for performance is stronger for buyout funds compared to venture capital funds, and declines in the sequence of a partnership’s funds. Our framework can be adapted to estimate implicit pay for performance in other asset management settings in which future fund flows and compensation depend on current performance.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16369.
Date of creation: Sep 2010
Date of revision:
Note: CF LS
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- 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.
- Chung, Ji-Woong & Sensoy, Berk A. & Stern, Lea H. & Weisbach, Michael S., 2010. "Pay for Performance from Future Fund Flows: The Case of Private Equity," SIFR Research Report Series 77, Institute for Financial Research.
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2013.
"CEO contract design: How do strong principals do it?,"
Journal of Financial Economics,
Elsevier, vol. 108(3), pages 659-674.
- Henrik CRONQVIST & Rüdiger FAHLENBRACH, . "CEO Contract Design: How Do Strong Principals Do It?," Swiss Finance Institute Research Paper Series 11-14, Swiss Finance Institute.
- Da Rin, M. & Hellmann, T. & Puri, M.L., 2011.
"A Survey of Venture Capital Research,"
2011-044, Tilburg University, Tilburg Law and Economic Center.
- Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper 2011-111, Tilburg University, Center for Economic Research.
- Marco Da Rin & Thomas F. Hellmann & Manju Puri, 2011. "A survey of venture capital research," NBER Working Papers 17523, National Bureau of Economic Research, Inc.
- Florencio Lopez-de-Silanes & Ludovic Phalippou & Oliver Gottschalg, 2011.
"Giants at the Gate: On the Cross-Section of Private Equity Investment Returns,"
Tinbergen Institute Discussion Papers
11-035/2/DSF12, Tinbergen Institute.
- Lopez-de-Silanes, Florencio & Phalippou, Ludovic & Gottschalg, Olivier, 2010. "Giants at the Gate: On the Cross-section of Private Equity Investment Returns," MPRA Paper 28487, University Library of Munich, Germany.
- Lim, Jongha & Minton, Bernadette A. & Weisbach, Michael S., 2014.
"Syndicated loan spreads and the composition of the syndicate,"
Journal of Financial Economics,
Elsevier, vol. 111(1), pages 45-69.
- Jongha Lim & Bernadette A. Minton & Michael Weisbach, 2012. "Syndicated Loan Spreads and the Composition of the Syndicate," NBER Working Papers 18356, National Bureau of Economic Research, Inc.
- Lim, Jongha & Minton, Bernadette A. & Weisbach, Michael S., 2012. "Syndicated Loan Spreads and the Composition of the Syndicate," Working Paper Series 2012-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- David T. Robinson & Berk A. Sensoy, 2013.
"Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance,"
Review of Financial Studies,
Society for Financial Studies, vol. 26(11), pages 2760-2797.
- Robinson, David T. & Sensoy, Berk A., 2011. "Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance," Working Paper Series 2011-14, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Achleitner, Ann-Kristin & Braun, Reiner & Engel, Nico, 2011. "Value creation and pricing in buyouts: Empirical evidence from Europe and North America," Review of Financial Economics, Elsevier, vol. 20(4), pages 146-161.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.