SSE/EFI Working Paper Series in Business Administration
Taking Private Equity Fees apart
Abstract: In this paper I build a simplified model of the
remuneration structure of a private equity fund using option theory. This
model is then used to analyze the relative importance of the fixed and
variable fee parts. The model is complemented with a structural model to
evaluate the financial choices of private equity fund managers. It turns
out that the control over the financial structure is valuable to the fund
manager, hence creating a conflict of interests.
From the fund managers
point of view the increased expected fee resulting from the independent
control over the financial structure of the fund is at some point off-set
by the increasing risk in the fund. This creates a static trade-off point
for a one fund manager. For a fund manager with future fund projects, there
is also a dynamic trade-off between current expected fee and the ability to
raise future funds.
Keywords: Private Equity; Fund manager; Fee structure; (follow links to similar papers)
20 pages, June 21, 2010, Revised January 18, 2013
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