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