Are Lower Fees Better? Changing the Management Fee Basis in Private Equity

Thursday October 27, 2022


Does reducing management fees to private equity fund managers preclude investors from hiring skilled managers and induce agency problems? I study a popular management fee contract that reduces management fees by paying a percentage of capital invested into the fund’s unrealized projects. Using a sample of buyout funds, I document investment patterns that imply that this contract induces managers to overinvest near the end of the fund’s investment period, overinvest into long-term projects, and delay exiting projects for fees. Having this contract on average reduces total management fees by 39.6%, but correlates negatively with several manager skill proxies and has a neutral relationship with net-of-fee fund performance.


YoungJun Soo, Duke University – Fuqua School of Business