Chapter 20, Private Equity - Opportunities and Risk
17 Pages Posted: 17 Jul 2014 Last revised: 31 Jan 2020
Date Written: July 15, 2014
This chapter explores compensation structure of PE funds. Actual fees that GPs earn and the economic incentives that they face are more subtle and complex than the traditional “2-and-20” rule suggests. This chapter examines the sources of these complexities especially focusing on the potential conflicts of interest that may arise between LPs and GPs due to particular forms of fee structure. The chapter also discusses the detailed procedures for calculating various fees under different fund terms and examines issues involving portfolio company fees. Finally, it reviews academic studies documenting the empirical magnitude of incentives for GPs, determinants of fee structure, and cross-sectional as well as time-series variations of compensation structure.
Keywords: Compensation structure, private equity, management fees, carried interest, portfolio company fees, catch-up provision, clawback clause, waterfall provision
JEL Classification: G24, G30
Suggested Citation: Suggested Citation