Optimal ownership structure in private equity

Bo Liu, Yang Liu and Jinqiang Yang

European Financial Management, 2018, vol. 24, issue 1, 113-135

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.

Date: 2018
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