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