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Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

50 Pages Posted: 22 Jul 2011 Last revised: 22 Jul 2013

David T. Robinson

Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Berk A. Sensoy

Vanderbilt University - Finance

Date Written: July 18, 2013

Abstract

We study the relations between management contract terms and performance in private equity using new data for 837 funds from 1984-2010. We nd no evidence that higher fees or lower managerial ownership are associated with lower net-of-fee performance. Nevertheless, compensation rises and shifts to performance-insensitive components during fundraising booms. Further, the behavior of distributions around contractual fee triggers is consistent with an underlying agency conflict between investors and fund managers. Our evidence suggests that managers with higher fees deliver higher gross performance, and highlights that agency costs are an inevitable consequence of the information frictions endemic to agency relationships.

Keywords: Private Equity, Cash Flows, Performance, Fees, Carried Interest, Ownership

JEL Classification: G01, G23, G24

Suggested Citation

Robinson, David T. and Sensoy, Berk A., Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance (July 18, 2013). The Review of Financial Studies, Forthcoming ; AFA 2012 Chicago Meetings Paper; Charles A. Dice Center Working Paper No. 2011-14; Fisher College of Business Working Paper No. 2011-03-014; UCD & CalPERS Sustainability & Finance Symposium 2013. Available at SSRN: https://ssrn.com/abstract=1890777 or http://dx.doi.org/10.2139/ssrn.1890777

David T. Robinson

Fuqua School of Business, Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Berk A. Sensoy (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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