Fund Ownership, Wealth, and Risk-Taking: Evidence on Private-Equity Managers
41 Pages Posted: 23 May 2022
There are 3 versions of this paper
Fund Ownership, Wealth, and Risk Taking: Evidence on Private Equity Managers
Fund Ownership, Wealth, and Risk-Taking: Evidence on Private-Equity Managers
Ownership, Wealth, and Risk Taking: Evidence on Private Equity Fund Managers
Abstract
Private equity managers are required to invest in the funds they manage. We examine the incentive effects of this ownership on the delegated acquisition decision. A simple model shows that managers select less risky firms and apply more debt, the higher their fund ownership. We test these predictions for a sample of Norwegian private equity acquisitions, using managers’ personal wealth to capture their different risk preferences. Consistent with the model, target company cash-flow risk decreases and leverage increases with the manager’s ownership scaled by wealth. Moreover, the higher the ownership, the smaller is relative deal size, increasing overall fund diversification.
Keywords: Private equity, incentives, fund manager, ownership, risk-taking, wealth
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