Abstract

http://ssrn.com/abstract=1554626
 
 

References (42)



 
 

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


Ji-Woong Chung


Korea University - Department of Finance

Berk A. Sensoy


Ohio State University - Fisher College of Business

Lea Henny Stern


Syracuse University - Department of Finance

Michael S. Weisbach


Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

November 19, 2011

Review of Financial Studies, Forthcoming
Charles A. Dice Center Working Paper No. 2010-003
Fisher College of Business Working Paper No. 2010-3-003

Abstract:     
Lifetime incomes of private equity general partners (GPs) are affected by their current funds’ performance not only directly, through carried interest profit-sharing provisions, but also indirectly by the effect of the current fund’s performance on GPs’ abilities to raise capital for future funds. In the context of a rational learning model, which we show better matches the empirical relations between future fundraising and current performance than behavioral alternatives, we estimate that indirect pay for performance from future fundraising is of the same order of magnitude as direct pay for performance from carried interest. Consistent with the learning framework, indirect pay for performance is stronger when managerial abilities are more scalable and weaker when current performance is less informative about ability. Specifically, it is stronger for buyout funds than for venture capital funds, and declines in the sequence of a partnership’s funds. Total pay for performance in private equity is both considerably larger and much more heterogeneous than implied by the carried interest alone. Our framework can be adapted to estimate indirect pay for performance in other asset management settings.

Number of Pages in PDF File: 52

Keywords: Private Equity, Venture Capital, Fundraising, Compensation, Incentives

JEL Classification: G23, G24

Accepted Paper Series


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Date posted: February 20, 2010 ; Last revised: December 11, 2011

Suggested Citation

Chung, Ji-Woong and Sensoy, Berk A. and Stern, Lea Henny and Weisbach, Michael S., Pay for Performance from Future Fund Flows: The Case of Private Equity (November 19, 2011). Review of Financial Studies, Forthcoming; Charles A. Dice Center Working Paper No. 2010-003; Fisher College of Business Working Paper No. 2010-3-003. Available at SSRN: http://ssrn.com/abstract=1554626

Contact Information

Ji-Woong Chung
Korea University - Department of Finance ( email )
Seoul, 136-701
Korea
Berk A. Sensoy
Ohio State University - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States

Lea Henny Stern
Syracuse University - Department of Finance ( email )
United States
Michael S. Weisbach (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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