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Paying for Performance in Private Equity: Evidence from Venture Capital Partnerships

Author

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  • Niklas Hüther

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • David T. Robinson

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Sönke Sievers

    (National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Thomas Hartmann-Wendels

    (Fakultät für Wirtschaftswissenschaften, University of Paderborn, Paderborn 33098, Germany)

Abstract

We offer the first empirical analysis connecting the timing of general partner (GP) compensation to private equity fund performance. Using detailed information on limited partnership agreements between private equity limited and general partners, we find that “GP-friendly” contracts—agreements that pay general partners on a deal-by-deal basis instead of withholding carried interest until a benchmark return has been earned—are associated with higher returns, both gross and net of fees. This is robust to measures of performance persistence, time period effects, and other contract terms and is related to exit-timing incentives. Timing practices balance GP incentives against limited partner downside protection.

Suggested Citation

  • Niklas Hüther & David T. Robinson & Sönke Sievers & Thomas Hartmann-Wendels, 2020. "Paying for Performance in Private Equity: Evidence from Venture Capital Partnerships," Management Science, INFORMS, vol. 66(4), pages 1756-1782, April.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:4:p:1756-1782
    DOI: 10.1287/mnsc.2018.3274
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    References listed on IDEAS

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    1. Brown, Gregory & Harris, Robert & Hu, Wendy & Jenkinson, Tim & Kaplan, Steven N. & Robinson, David T., 2021. "Can investors time their exposure to private equity?," Journal of Financial Economics, Elsevier, vol. 139(2), pages 561-577.

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