Beware of Venturing into Private Equity
As a step towards understanding whether a private equity governance structure reduces overall agency conflicts relative to a public equity governance structure (as is often argued), this paper describes the contracts between private equity funds and investors, and the returns earned by investors. The paper sets the stage with a puzzle: the average performance of private equity funds is above that of the Standard and Poor's 500 - the main public stock market index - before fees are charged, but below that benchmark after fees are charged. Why are the payments to private equity buyout funds so large? Why does the marginal investor invest in buyout funds? I explore one potential answer (and probably the most controversial): that some investors are fooled. I show that the fee contracts for these funds are opaque. Considering this and the way that compensation contracts bury, in details, costly provisions that are difficult to justify on the basis of proper incentive alignment, it would be premature to assert that the agency conflicts are lower in private equity than in public equity.
Volume (Year): 23 (2009)
Issue (Month): 1 (Winter)
|Contact details of provider:|| Web page: https://www.aeaweb.org/jep/|
More information through EDIRC
|Order Information:||Web: https://www.aeaweb.org/subscribe.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrei Shleifer & Robert W. Vishny, 1995.
"A Survey of Corporate Governance,"
Harvard Institute of Economic Research Working Papers
1741, Harvard - Institute of Economic Research.
- Joost Driessen & Tse-Chun Lin & Ludovic Phalippou, 2008.
"A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds,"
NBER Working Papers
14144, National Bureau of Economic Research, Inc.
- Driessen, Joost & Lin, Tse-Chun & Phalippou, Ludovic, 2012. "A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(03), pages 511-535, August.
- Lee, Peggy M. & Wahal, Sunil, 2004. "Grandstanding, certification and the underpricing of venture capital backed IPOs," Journal of Financial Economics, Elsevier, vol. 73(2), pages 375-407, August.
- José-Miguel Gaspar & Massimo Massa & Pedro Matos, 2006. "Favoritism in Mutual Fund Families? Evidence on Strategic Cross-Fund Subsidization," Journal of Finance, American Finance Association, vol. 61(1), pages 73-104, 02.
- William Fung & David A. Hsieh & Narayan Y. Naik & Tarun Ramadorai, 2008.
"Hedge Funds: Performance, Risk, and Capital Formation,"
Journal of Finance,
American Finance Association, vol. 63(4), pages 1777-1803, 08.
- Fung, William & Hsieh, David A & Naik, Narayan & Ramadorai, Tarun, 2006. "Hedge Funds: Performance, Risk and Capital Formation," CEPR Discussion Papers 5565, C.E.P.R. Discussion Papers.
- Steven N. Kaplan & Antoinette Schoar, 2005.
"Private Equity Performance: Returns, Persistence, and Capital Flows,"
Journal of Finance,
American Finance Association, vol. 60(4), pages 1791-1823, 08.
- Kaplan, Steve & Schoar, Antoinette, 2004. "Private Equity Performance: Returns, Persistence and Capital Flows," Working papers 4446-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Xavier Gabaix & David Laibson, 2006.
"Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 121(2), pages 505-540.
- Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
- Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
- Eric Zitzewitz, 2005.
"How Widespread is Late Trading in Mutual Funds?,"
- Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
- Josh Lerner & Antoinette Schoar & Wan Wongsunwai, 2007.
"Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle,"
Journal of Finance,
American Finance Association, vol. 62(2), pages 731-764, 04.
- Josh Lerner & Antoinette Schoar & Wan Wong, 2005. "Smart Institutions, Foolish Choices? The Limited Partner Performance Puzzle," NBER Working Papers 11136, National Bureau of Economic Research, Inc.
- Jennifer S. Conrad, 2001. "Institutional Trading and Soft Dollars," Journal of Finance, American Finance Association, vol. 56(1), pages 397-416, 02.
- Malkiel, Burton G, 1995. " Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, vol. 50(2), pages 549-72, June.
When requesting a correction, please mention this item's handle: RePEc:aea:jecper:v:23:y:2009:i:1:p:147-66. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)or (Michael P. Albert)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.