The Economics of Private Equity Funds

Andrew Metrick · Ayako Yasuda

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Private Equity and Venture Capital Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

This article analyzes the economics of the private equity industry using a novel model and dataset. We obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1993 and 2006. We build a model to estimate the expected revenue to managers as a function of their investor contracts, and we test how this estimated revenue varies across the characteristics of our sample funds. Among our sample funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. We find sharp differences between venture capital (VC) and buyout (BO) funds. BO managers build on their prior experience by increasing the size of their funds faster than VC managers do. This leads to significantly higher revenue per partner and per professional in later BO funds. The results suggest that the BO business is more scalable than the VC business and that past success has a differential impact on the terms of their future funds.

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References

2002Venture Capital and the Professionalization of Start‐Up Firms: Empirical Evidence 2005Private Equity Performance: Returns, Persistence, and Capital Flows 2007Whom You Know Matters: Venture Capital Networks and Investment Performance 2004What Do Entrepreneurs Pay for Venture Capital Affiliation?2000The Interaction between Product Market and Financing Strategy: The Role of Venture Capital 2007How Smart Is Smart Money? A Two‐Sided Matching Model of Venture Capital 2004The risk and return of venture capital

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2009Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?2011A Survey of Venture Capital Research 2012Corporate Governance and Value Creation: Evidence from Private Equity 2016What do private equity firms say they do?2011The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking 2012Private Equity Performance: What Do We Know?2009Why Are Buyouts Levered? The Financial Structure of Private Equity Funds

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