Private Equity Fund Debt: Agency Costs and Cash Flow Management

Abstract

We study the emergence of private equity fund debt and its impact on cash flows, performance, and agency relationships. Funds using debt delay capital calls, boosting performance measures sensitive to cash flow timing. They also call capital less frequently. We find that general partners use fund debt during fundraising to increase the likelihood of raising a follow-on fund and near the hurdle rate to increase their carried interest compensation, indicating that fund debt exacerbates agency conflicts in private equity. A large-scale survey of general partners and limited partners suggests that fund debt facilitates cash flow management and amplifies agency conflicts.

Keywords: Private equity, fund debt, performance, agency conflicts

JEL Classification: G23, G32, E22