Fee Levels, Performance and Alignment of Interests in Private Equity

46 Pages Posted: 23 Jul 2013 Last revised: 18 Feb 2015

Cyril Demaria

University of St. Gallen

Date Written: July 15, 2013


While PE data is subject to time-lag and still US-centric, twenty years of data provide grounds for a thorough analysis of private equity funds (PEF) performances. To do so, we model gross returns for US and EMEA PEFs. We benchmark returns with total market indexes (TMI) using the PME method with the DPI as a regulator of distributions. We find that average US funds perform in line with the calculated benchmarks on a net and gross basis: funds have marginally better IRRs; indexes better multiples. Carried interest has no material impact on the relative performance of funds: when a vintage underperforms the index on a net basis, this holds true on a gross basis. Top quartile funds show an outperformance on a net and gross basis, and timing of cash-flows explains part of this performance. Computing “Bain Capital scenarios” show that the 1%-30% formula is marginally more attractive than a 1.5%-20%, increasing returns by 2.3% over 16 years (0.15% per year). We conclude that more than levels of management fees and carried interest, the level of preferred return rate might reduce the alignment of interests between fund managers and investors. Calculating a spread with PME -DPI index and sharing the resulting alpha might prove more efficient.

Keywords: private equity, venture capital, leveraged buy-out, performance, fees, alignment of interests

JEL Classification: G24, G28, G32

Suggested Citation

Demaria, Cyril, Fee Levels, Performance and Alignment of Interests in Private Equity (July 15, 2013). Forthcoming Journal of Alternative Investments (Spring 2015). Available at SSRN: https://ssrn.com/abstract=2296971 or http://dx.doi.org/10.2139/ssrn.2296971

Cyril Demaria (Contact Author)

University of St. Gallen ( email )

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