NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Private Equity Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

David T. Robinson, Berk A. Sensoy

NBER Working Paper No. 17942
Issued in March 2012
NBER Program(s):   CF   PR

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.

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Document Object Identifier (DOI): 10.3386/w17942

Published: Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance David T. Robinson Duke University and NBER Berk A. Sensoy, Rev. Financ. Stud. (2013) 26 (11): 2760-2797. doi: 10.1093/rfs/hht055 First published online: September 2, 2013

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