Default Penalties in Private Equity Partnerships
59 Pages Posted: 18 Oct 2007 Last revised: 17 Nov 2017
Date Written: June 30, 2016
Abstract
Default penalties are commonly observed in private equity funds. These penalties are levied on limited partners that miss out on a capital call. We show that default penalties are part of an optimal contract between limited and general partners. Default penalties help limited partners in screening general partners, and in minimizing distortions in investment levels and fees, caused by information asymmetries between general and limited partners. We also show that an optimal fee structure requires management fees that are proportional to capital under management, and transaction fees that are paid during the life of the fund when investments are made.
Keywords: private equity, default penalties, management fees, transaction fees
JEL Classification: D82, D86, G23, G24, J33
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Steven N. Kaplan and Per Strömberg
-
By Steven N. Kaplan and Per Strömberg
-
Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets
By Ronald J. Gilson and Bernard S. Black
-
Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations
By Paul A. Gompers and Josh Lerner
-
Private Equity Performance: Returns, Persistence and Capital Flows
-
Private Equity Performance: Returns, Persistence and Capital
-
The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
-
Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
By Thomas F. Hellmann and Manju Puri