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

David Robinson and Berk A. Sensoy

No 17942, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G00 G23 G24 G34 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-hrm
Note: CF PR
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Citations: View citations in EconPapers (2)

Published as David T. Robinson & Berk A. Sensoy, 2013. "Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance," Review of Financial Studies, vol 26(11), pages 2760-2797.

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