Private Equity Fund Debt: Agency Costs and Cash Flow Management

74 Pages Posted: 27 Jun 2019 Last revised: 6 Mar 2024

See all articles by James F. Albertus

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Date Written: March 4, 2024

Abstract

We study the emergence of private equity fund debt and its impact on cash flows, performance, and agency relationships. Funds using debt delay capital calls, boosting performance measures sensitive to cash flow timing. They also call capital less frequently. We find that general partners use fund debt during fundraising to increase the likelihood of raising a follow-on fund and near the hurdle rate to increase their carried interest compensation, indicating that fund debt exacerbates agency conflicts in private equity. A large-scale survey of general partners and limited partners suggests that fund debt facilitates cash flow management and amplifies agency conflicts.

Keywords: Private equity, fund debt, performance, agency conflicts

JEL Classification: G23, G32, E22

Suggested Citation

Albertus, James F. and Denes, Matthew, Private Equity Fund Debt: Agency Costs and Cash Flow Management (March 4, 2024). Available at SSRN: https://ssrn.com/abstract=3410076 or http://dx.doi.org/10.2139/ssrn.3410076

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Matthew Denes (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://sites.google.com/site/matthewdenes

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