Data Room: Fund economics

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It should come as no surprise to learn that the founding partners at a private equity firm take home a bigger share of the fund economics than non-founders. What may be less well known is just how large the spreads are and how that ultimately affects fund performance.

A study of 717 private equity partnerships conducted by Victoria Ivashina and Josh Lerner of Harvard University found that a founding partner receives on average 19.2 percent of carried interest, compared with 11.3 percent for a non-founder. Having founder status increases a partner’s carry share by 7-8 percent, and ownership by 10-19 percent.

Pay Now or Pay Later? The Economics Within the Private Equity Partnership, which was published in March, also measured the difference between senior and junior partners. Those in the top echelon receive an average 15 percent of carried interest and 21 percent of the firm’s ownership. Junior-level partners, meanwhile, receive 7 percent of carry and 3 percent of ownership, with the majority of junior partners not getting any carry at all.

The researchers found that having a lower share of carry and ownership increases a partner’s chances of leaving the fund – one standard deviation increase in the difference in carry shares upped the departure rate by 2.2 percent.

This was even more profound for ownership inequality, with one standard deviation increase in difference between ownership stakes raising the departure rate by 3.7 percent.

Departures make it harder for firms to raise future funds, partly because investors want team stability in a general partner before they commit capital. The study found that one senior partner’s departure at an average-sized firm with four senior partners leads to a 17 percent decrease in the size of the next fund.

9%
Probability that a given senior partner will depart (at the mean fund observed)

12%
Probability that a given junior partner will depart (at the mean fund observed)

10%
Peak distribution of carried interest for senior partners

0%
What most junior partners receive in carried interest