Deal-by-Deal Compensation Structures and Portfolio Diversification
89 Pages Posted: 12 Dec 2018 Last revised: 16 Mar 2019
Date Written: March 4, 2019
This paper studies the relationship between compensation, investment strategies and performance in private equity. Some funds adopt deal-by-deal carried interest models. Under these rules, bonus payments to General Partners are a function of each deal within the fund. These are paid only when positive deal returns are realized, resembling a portfolio of call options. I show that deal-by-deal compensation induces greater heterogeneity in portfolio investments. Funds select firms with increased diversification across specific risk factors. Net performance is negatively affected by higher fee payments. This paper uses a new dataset that includes fee and investor cash flow data.
Keywords: Deal-By-Deal, Carried Interest, Private Equity, Compensation, Incentives, Diversification, Fees, Performance, Separated
JEL Classification: G24, G28, G34, G38
Suggested Citation: Suggested Citation