Default Penalties in Private Equity Partnerships

59 Pages Posted: 18 Oct 2007 Last revised: 17 Nov 2017

See all articles by Filippo Ippolito

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Albert Banal-Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB); City University London - Department of Economics

Sergio Vicente

Universidad Carlos III de Madrid; Queen Mary University of London

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

Ippolito, Filippo and Banal Estañol, Albert and Vicente, Sergio, Default Penalties in Private Equity Partnerships (June 30, 2016). Available at SSRN: https://ssrn.com/abstract=1022023 or http://dx.doi.org/10.2139/ssrn.1022023

Filippo Ippolito (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Albert Banal Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Sergio Vicente

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Queen Mary University of London ( email )

MILE END RD, LONDON
LONDON, E1 4NS
United Kingdom

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