Optimal Ownership Structure in Private Equity

23 Pages Posted: 19 Jan 2018

See all articles by Bo Liu

Bo Liu

University of Electronic Science and Technology of China (UESTC) - School of Economics and Management

Yang Liu

Shanghai University of Finance and Economics

Jinqiang Yang

Columbia University; Shanghai University of Finance and Economics

Date Written: January 2018

Abstract

We develop a tractable model to analyse the valuation of a general partner (GP) and the ownership allocation in a private equity (PE) fund. Our results indicate that holding ownership will increase GP's value. We further explore the influential factors that affect GP's optimal ownership decision. Our model predicts that GP's managerial skill has positive effects on GP's shareholding choice. Factors such as leverage, unspanned risks, GP's compensation have negative impacts on GP ownership decision. The fund's maturity has a non‐monotonic and concave influence. Moreover, the widely used performance measures implied by our model are consistent with empirical findings.

Keywords: illiquidity, incomplete market, managerial compensation, ownership structure, private equity

Suggested Citation

Liu, Bo and Liu, Yang and Yang, Jinqiang, Optimal Ownership Structure in Private Equity (January 2018). European Financial Management, Vol. 24, Issue 1, pp. 113-135, 2018. Available at SSRN: https://ssrn.com/abstract=3105038 or http://dx.doi.org/10.1111/eufm.12130

Bo Liu (Contact Author)

University of Electronic Science and Technology of China (UESTC) - School of Economics and Management ( email )

No. 4 Section 2
North Jianshe Road
Chengdu, Si Chuan 610054
China

Yang Liu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Jinqiang Yang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Shanghai University of Finance and Economics ( email )

Law School, 777 Guoding Road, Yangpu District
Shanghai, AK 200433
China

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