Selling Private Equity Fees

Abstract

We examine the sale of General Partner (GP) cash flow claims by Private Equity (PE) firms, termed GP stakes, and the economic forces behind their rise. Larger PE firms that frequently admit new partners, respond positively to industry-wide fundraising opportunities, and have better performance records sell GP stakes. Buyers, usually funds sponsored by other PE firms, outperform public markets. Our results suggest GP stake screening processes and contract design help mitigate moral hazard and adverse selection concerns, providing growth capital for successful PE firms. Sellers’ partners do not leave, while their scale and firm-level investment subsequently increase without compromising returns.

Keywords: Private Equity, General Partner, Fees, Fund Managers, Agency Conflicts, External Financing, Minority Acquisition

JEL Classification: G24, G30, G34