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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
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    File URL: https://doi.org/10.1111/eufm.12130
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    1. Robert S. Harris & Tim Jenkinson & Steven N. Kaplan, 2014. "Private Equity Performance: What Do We Know?," Journal of Finance, American Finance Association, vol. 69(5), pages 1851-1882, October.
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    6. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    7. Andrew Metrick & Ayako Yasuda, 2011. "Venture Capital and Other Private Equity: a Survey," European Financial Management, European Financial Management Association, vol. 17(4), pages 619-654, September.
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    9. Taylor D. Nadauld & Berk A. Sensoy & Keith Vorkink & Michael S. Weisbach, 2016. "The Liquidity Cost of Private Equity Investments: Evidence from Secondary Market Transactions," NBER Working Papers 22404, National Bureau of Economic Research, Inc.
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    13. Morten Sorensen & Neng Wang & Jinqiang Yang, 2014. "Valuing Private Equity," Review of Financial Studies, Society for Financial Studies, vol. 27(7), pages 1977-2021.
    14. 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, August.
    15. 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.
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