TY  - JOUR
AU  - Chung,Ji-Woong
AU  - Sensoy,Berk A.
AU  - Stern,Lea H.
AU  - Weisbach,Michael S.
TI  - Pay for Performance from Future Fund Flows: The Case of Private Equity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16369
PY  - 2010
Y2  - September 2010
UR  - http://www.nber.org/papers/w16369
L1  - http://www.nber.org/papers/w16369.pdf
N1  - Author contact info:
Ji-Woong Chung
Department of Finance
Faculty of Business Administration
The Chinese University of Hong Kong
The Teaching Building
No. 12, Chak Cheung Street
Shatin, N.T., Hong Kong
E-Mail: jwchung@baf.msmail.cuhk.edu.hk

Berk Sensoy
Ohio State University
2100 Neil Ave.
Columbus, OH 43210
E-Mail: sensoy_4@fisher.osu.edu

Lea H. Stern
Department of Finance Ohio State University
E-Mail: stern_122@fisher.osu.edu

Michael Weisbach
Department of Finance
Fisher College of Business
Ohio State University
2100 Neil Ave.
Columbus, OH  43210
Tel: 614/292-3264
E-Mail: weisbach.2@osu.edu
AB  - 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.
ER  -