Paying for Performance in Private Equity: Evidence from Venture Capital Partnerships

Niklas Hüther (), David Robinson, Sönke Sievers () and Thomas Hartmann-Wendels ()
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Niklas Hüther: Kelley School of Business, Indiana University, Bloomington, Indiana 47405
Sönke Sievers: National Bureau of Economic Research, Cambridge, Massachusetts 02138
Thomas Hartmann-Wendels: Fakultät für Wirtschaftswissenschaften, University of Paderborn, Paderborn 33098, Germany

Management Science, 2020, vol. 66, issue 4, 1756-1782

Abstract: We offer the first empirical analysis connecting the timing of general partner (GP) compensation to private equity fund performance. Using detailed information on limited partnership agreements between private equity limited and general partners, we find that “GP-friendly” contracts—agreements that pay general partners on a deal-by-deal basis instead of withholding carried interest until a benchmark return has been earned—are associated with higher returns, both gross and net of fees. This is robust to measures of performance persistence, time period effects, and other contract terms and is related to exit-timing incentives. Timing practices balance GP incentives against limited partner downside protection.

Keywords: venture capital; compensation; private equity; VC partnership; pay-performance relation (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:66:y:2020:i:4:p:1756-1782

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