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

47 Pages Posted: 31 Mar 2012  

David T. Robinson

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

Berk A. Sensoy

Ohio State University - Fisher College of Business

Date Written: March 2012

Abstract

We study the relation between compensation practices, incentives, and performance in private equity using new data that connect ownership structures, management contracts, and quarterly cash flows for a large sample of buyout and venture capital funds from 1984-2010. Although many critics of private equity argue that PE firms earn excessive compensation and have muted performance incentives, we find no evidence that higher compensation or lower managerial ownership are associated with worse net-of-fee performance, in stark contrast to other asset management settings. Instead, compensation is largely unrelated to net-of-fee cash flow performance. Nevertheless, market conditions during fundraising are an important driver of compensation, as pay rises and shifts to fixed components during fundraising booms. In addition, the behavior of distributions around contractual triggers for fees and carried interest is consistent with an underlying agency conflict between investors and general partners. Our evidence is most consistent with an equilibrium in which compensation terms reflect agency concerns and the productivity of manager skills, and in which managers with higher compensation earn back their pay by delivering higher gross performance.

Suggested Citation

Robinson, David T. and Sensoy, Berk A., Do Private Equity Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance (March 2012). NBER Working Paper No. w17942. Available at SSRN: https://ssrn.com/abstract=2031930

David T. Robinson (Contact Author)

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

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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