Working Paper: NBER ID: w17942
Authors: David T. Robinson; Berk A. Sensoy
Abstract: We study the relation between compensation practices, incentives, and performance in private equity using new data that connect ownership structures, management contracts, and quarterly cash flows for a large sample of buyout and venture capital funds from 1984-2010. Although many critics of private equity argue that PE firms earn excessive compensation and have muted performance incentives, we find no evidence that higher compensation or lower managerial ownership are associated with worse net-of-fee performance, in stark contrast to other asset management settings. Instead, compensation is largely unrelated to net-of-fee cash flow performance. Nevertheless, market conditions during fundraising are an important driver of compensation, as pay rises and shifts to fixed components during fundraising booms. In addition, the behavior of distributions around contractual triggers for fees and carried interest is consistent with an underlying agency conflict between investors and general partners. Our evidence is most consistent with an equilibrium in which compensation terms reflect agency concerns and the productivity of manager skills, and in which managers with higher compensation earn back their pay by delivering higher gross performance.
Keywords: Private Equity; Compensation; Performance; Management Contracts; Agency Theory
JEL Codes: G00; G23; G24; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher compensation (J33) | worse net-of-fee performance (G19) |
| lower managerial ownership (G32) | worse net-of-fee performance (G19) |
| higher compensation (J33) | agency concerns (L85) |
| higher compensation (J33) | manager productivity (M54) |
| higher fixed management fees (G32) | underperformance (D29) |
| lower GP ownership (G32) | underperformance (D29) |
| higher compensation (J33) | greater ability to generate gross returns (G11) |
| clustering of distributions around contractual triggers (D39) | agency conflicts (G34) |
| GPs timing exits to maximize carried interest (G11) | LP returns (E30) |