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Optimal ownership structure in private equity

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  • Bo Liu
  • Yang Liu
  • Jinqiang Yang

Abstract

We develop a tractable model to analyse the valuation of a general partner (GP) and the ownership allocation in a private equity (PE) fund. Our results indicate that holding ownership will increase GP's value. We further explore the influential factors that affect GP's optimal ownership decision. Our model predicts that GP's managerial skill has positive effects on GP's shareholding choice. Factors such as leverage, unspanned risks, GP's compensation have negative impacts on GP ownership decision. The fund's maturity has a non†monotonic and concave influence. Moreover, the widely used performance measures implied by our model are consistent with empirical findings.

Suggested Citation

  • Bo Liu & Yang Liu & Jinqiang Yang, 2018. "Optimal ownership structure in private equity," European Financial Management, European Financial Management Association, vol. 24(1), pages 113-135, January.
    • Handle: RePEc:bla:eufman:v:24:y:2018:i:1:p:113-135
    DOI: 10.1111/eufm.12130
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    References listed on IDEAS

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    Cited by:

    1. Bian, Yuxiang & Chen, Lin & Xiong, Xiong & Yang, Jinqiang, 2023. "Private equity valuation under time-inconsistent preferences," Research in International Business and Finance, Elsevier, vol. 65(C).
    2. Edward Stringham & Jack Vogel, 2018. "The leveraged invisible hand: how private equity enhances the market for corporate control and capitalism itself," European Journal of Law and Economics, Springer, vol. 46(2), pages 223-244, October.

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