Pay for Performance from Future Fund Flows: The Case of Private Equity

Ji-Woong Chung, Berk A. Sensoy, Lea H. Stern and Michael Weisbach

No 16369, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Lifetime incomes of private equity general partners are affected by their current funds' performance through both carried interest profit sharing provisions, and also by the effect of the current fund's performance on general partners' abilities to raise capital for future funds. We present a learning-based framework for estimating the market-based pay for performance arising from future fundraising. For the typical first-time private equity fund, we estimate that implicit pay for performance from expected future fundraising is approximately the same order of magnitude as the explicit pay for performance general partners receive from carried interest in their current fund, implying that the performance-sensitive component of general partner revenue is about twice as large as commonly discussed. Consistent with the learning framework, we find that implicit pay for performance is stronger when managerial abilities are more scalable and weaker when current performance contains less new information about ability. Specifically, implicit pay for performance is stronger for buyout funds compared to venture capital funds, and declines in the sequence of a partnership's funds. Our framework can be adapted to estimate implicit pay for performance in other asset management settings in which future fund flows and compensation depend on current performance.

JEL-codes: G24 G30 J33 (search for similar items in EconPapers)
Date: 2010-09
Note: CF LS
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Citations: View citations in EconPapers (10)

Published as Ji-Woong Chung & Berk A. Sensoy & Léa Stern & Michael S. Weisbach, 2012. "Pay for Performance from Future Fund Flows: The Case of Private Equity," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3259-3304.

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Related works:
Journal Article: Pay for Performance from Future Fund Flows: The Case of Private Equity (2012)
Working Paper: Pay for Performance from Future Fund Flows: The Case of Private Equity (2010)
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