TY  - JOUR
AU  - Choi,Wonho Wilson
AU  - Metrick,Andrew
AU  - Yasuda,Ayako
TI  - A Model of Private Equity Fund Compensation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17568
PY  - 2011
Y2  - November 2011
UR  - http://www.nber.org/papers/w17568
L1  - http://www.nber.org/papers/w17568.pdf
N1  - Author contact info:
Wilson W. Choi
KAIST Business School, S228
Seoul, South Korea
E-Mail: wonhochoi@business.kaist.ac.kr

Andrew Metrick
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520
Tel: 203/432-3069
E-Mail: metrick@yale.edu

Ayako Yasuda
Graduate School of Management
UC Davis
3206 Gallagher Hall
One Shields Ave.
Davis, CA 95616-8609
Tel: 530-752-0775 
Fax: 530-752-2924
E-Mail: asyasuda@ucdavis.edu
AB  - This paper analyzes the economics of the private equity fund compensation. We build a novel model to estimate the expected revenue to fund managers as a function of their investor contracts. In particular, we evaluate the present value of the fair-value test (FVT) carried interest scheme, which is one of the most common profit-sharing arrangements observed in practice. We extend the simulation model developed in Metrick and Yasuda (2010a) and compare the relative values of the FVT carry scheme to other benchmark carry schemes. We find that the FVT carry scheme is substantially more valuable to the fund managers than other commonly observed (and more conservative) carry schemes, largely due to the early timing of carry compensation that frequently occurs under the FVT scheme. Interestingly, conditional on having an FVT carry scheme, fund managers’ incremental gains from inflating the reported values of the funds’ un- exited portfolio companies would be negligible.
ER  -