Incentives of Private Equity General Partners from Future Fundraising

Ji-Woong Chung, Berk A. Sensoy, Lea H. Stern and Michael Weisbach
Additional contact information
Ji-Woong Chung: Ohio State University
Berk A. Sensoy: Ohio State University
Lea H. Stern: Ohio State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Incentives from the explicit fee structure ("two and twenty") of private equity funds understate the actual incentives facing private equity general partners because they ignore the rewards stemming from the effect of current performance on the ability to raise larger funds in the future. We evaluate the importance of these implicit incentives in the context of a learning model in which investors use current performance to update their assessments of a general partner's ability, and, in turn, decide how much capital to allocate to the partners' next fund. Our estimates suggest that implicit incentives from expected future fundraising are about as large as explicit incentives from carried interest in the current fund. This implies that the performance-sensitive component of revenue is about twice as large as suggested by previous estimates based only on explicit fees. Consistent with the model, we find that these implicit incentives are stronger when abilities are more scalable and weaker when current performance is less informative about ability. Overall, the results suggest that implicit incentives from future fundraising have a substantial impact on general partners' welfare and are likely to be an important factor in the success of private equity firms.

Date: 2010-02
New Economics Papers: this item is included in nep-cta
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.cob.ohio-state.edu/fin/dice/papers/2010/2010-3.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.cob.ohio-state.edu/fin/dice/papers/2010/2010-3.pdf [301 Moved Permanently]--> https://www.cob.ohio-state.edu/fin/dice/papers/2010/2010-3.pdf [301 Moved Permanently]--> https://fisher.osu.edu/fin/dice/papers/2010/2010-3.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2010-3

Access Statistics for this paper

More papers in Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().