The Economics of Private Equity Funds
Yale School of Management; National Bureau of Economic Research (NBER)
University of California, Davis - Graduate School of Management
June 9, 2009
Review of Financial Studies, Vol. 23, pp. 2303-2341
Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market
This paper analyzes the economics of the private equity industry using a novel model and dataset. We obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1993 and 2006. We build a model to estimate the expected revenue to managers as a function of their investor contracts, and we test how this estimated revenue varies across the characteristics of our sample funds. Among our sample funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. We find sharp differences between venture capital (VC) and buyout (BO) funds. BO managers build on their prior experience by increasing the size of their funds faster than VC managers do. This leads to significantly higher revenue per partner and per professional in later BO funds. The results suggest that the BO business is more scalable than the VC business, and that past success has a differential impact on the terms of their future funds.
Number of Pages in PDF File: 57
Keywords: private equity, venture capital, fund managers
JEL Classification: G1, G2
Date posted: June 27, 2007 ; Last revised: August 3, 2010
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