Ownership, Wealth, and Risk Taking: Evidence on Private Equity Fund Managers

33 Pages Posted: 2 Aug 2019

See all articles by Carsten Bienz

Carsten Bienz

Norwegian School of Economics (NHH)

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Uwe Walz

Goethe University Frankfurt - Institute of Economics; Center For Financial Studies (CFS); Goethe University Frankfurt - Research Center SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2019

Abstract

We examine the incentive effects of private equity (PE) professionals' ownership in the funds they manage. In a simple model, we show that managers select less risky firms and use more debt financing the higher their ownership. We test these predictions for a sample of PE funds in Norway, where the professionals' private wealth is public. Consistent with the model, firm risk decreases and leverage increases with the manager's ownership in the fund, but largely only when scaled with her wealth. Moreover, the higher the ownership, the smaller is each individual investment, increasing fund diversification. Our results suggest that wealth is of first-order importance when designing incentive contracts requiring PE fund managers to coinvest.

Keywords: Private equity, buyouts, incentives, general partner, ownership, risk taking, wealth

JEL Classification: D86, G12, G31, G32, G34

Suggested Citation

Bienz, Carsten and Thorburn, Karin S. and Walz, Uwe, Ownership, Wealth, and Risk Taking: Evidence on Private Equity Fund Managers (July 30, 2019). Available at SSRN: https://ssrn.com/abstract=3428969 or http://dx.doi.org/10.2139/ssrn.3428969

Carsten Bienz

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen
Norway

Karin S. Thorburn (Contact Author)

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Uwe Walz

Goethe University Frankfurt - Institute of Economics ( email )

Postfach 81
D-60054 Frankfurt
Germany

Center For Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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