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

Magro, João António, Deal-by-Deal Compensation Structures and Portfolio Diversification (March 4, 2019). Available at SSRN: or

João António Magro (Contact Author)

Nova School of Business and Economics ( email )


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