NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Pay for Performance from Future Fund Flows: The Case of Private Equity

Ji-Woong Chung, Berk A. Sensoy, Lea H. Stern, Michael S. Weisbach

NBER Working Paper No. 16369
Issued in September 2010
NBER Program(s):   CF   LS

Lifetime incomes of private equity general partners are affected by their current funds’ performance through both carried interest profit sharing provisions, and also by the effect of the current fund’s performance on general partners’ abilities to raise capital for future funds. We present a learning-based framework for estimating the market-based pay for performance arising from future fundraising. For the typical first-time private equity fund, we estimate that implicit pay for performance from expected future fundraising is approximately the same order of magnitude as the explicit pay for performance general partners receive from carried interest in their current fund, implying that the performance-sensitive component of general partner revenue is about twice as large as commonly discussed. Consistent with the learning framework, we find that implicit pay for performance is stronger when managerial abilities are more scalable and weaker when current performance contains less new information about ability. Specifically, implicit pay for performance is stronger for buyout funds compared to venture capital funds, and declines in the sequence of a partnership’s funds. Our framework can be adapted to estimate implicit pay for performance in other asset management settings in which future fund flows and compensation depend on current performance.

download in pdf format
   (861 K)

email paper

This paper is available as PDF (861 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16369

Published: Ji-Woong Chung & Berk A. Sensoy & Léa Stern & Michael S. Weisbach, 2012. "Pay for Performance from Future Fund Flows: The Case of Private Equity," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3259-3304. citation courtesy of

Users who downloaded this paper also downloaded these:
Bernstein, Lerner, Sorensen, and Stromberg w15632 Private Equity and Industry Performance
Jegadeesh, Kraussl, and Pollet w15335 Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices
Harris, Jenkinson, and Kaplan w17874 Private Equity Performance: What Do We Know?
Metrick and Yasuda w16652 Venture Capital and Other Private Equity: A Survey
Robinson and Sensoy w17428 Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us