Paying for Performance in Private Equity: Evidence from VC Partnerships

Abstract

We offer the first empirical analysis connecting the timing of general partner (GP) compensation to private equity fund performance. Using detailed information on limited partnership agreements between private equity limited and general partners, we find that "GP-friendly" contracts - agreements that pay general partners on a deal-by-deal basis instead of withholding carried interest until a benchmark return has been earned - are associated with higher returns, both gross and net of fees. This is robust to measures of performance persistence, time period effects, and other contract terms, and is related to exit-timing incentives. Timing practices balance GP incentives against limited partner downside protection.

Keywords: venture capital, compensation, private equity, VC partnership, pay-performance relation

JEL Classification: G10, G23, G24