Working Paper: CEPR ID: DP13944
Authors: Karin S. Thorburn; Carsten Bienz; Uwe Walz
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 Codes: D86; G12; G31; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher GP ownership (J54) | decrease in firm risk (G32) |
| Higher GP ownership (J54) | increase in leverage (G32) |
| Higher GP ownership (J54) | increase in incentive to diversify investments (G11) |
| Higher GP ownership (J54) | decrease in asset beta (G12) |