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

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Listed author(s):
  • David T. Robinson
  • Berk A. Sensoy

Abstract

We study the relation between compensation practices, incentives, and performance in private equity using new data that connect ownership structures, management contracts, and quarterly cash flows for a large sample of buyout and venture capital funds from 1984-2010. Although many critics of private equity argue that PE firms earn excessive compensation and have muted performance incentives, 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-of-fee cash flow performance. Nevertheless, market conditions during fundraising are an important driver of compensation, as pay rises and shifts to fixed components during fundraising booms. In addition, the behavior of distributions around contractual triggers for fees and carried interest is consistent with an underlying agency conflict between investors and general partners. 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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File URL: http://www.nber.org/papers/w17942.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17942.

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Date of creation: Mar 2012
Publication status: published as Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance David T. Robinson Duke University and NBER Berk A. Sensoy, Rev. Financ. Stud. (2013) 26 (11): 2760-2797. doi: 10.1093/rfs/hht055 First published online: September 2, 2013
Handle: RePEc:nbr:nberwo:17942
Note: CF PR
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Keywords:

Find related papers by JEL classification:

  • G00 - Financial Economics - - General - - - General
  • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
  • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
  • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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  13. Michael Ewens & Charles M. Jones & Matthew Rhodes-Kropf, 2013. "The Price of Diversifiable Risk in Venture Capital and Private Equity," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1854-1889.
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  16. 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.
  17. Gompers, Paul A., 1996. "Grandstanding in the venture capital industry," Journal of Financial Economics, Elsevier, vol. 42(1), pages 133-156, September.
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Cited by:

  1. Liu, Yang & Yang, Jinqiang, 2015. "Optimal investment of private equity," Finance Research Letters, Elsevier, vol. 14(C), pages 76-86.

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