DP13944 Ownership, wealth, and risk taking: Evidence on private equity fund managers
|Author(s):||Carsten Bienz, Karin S Thorburn, Uwe Walz|
|Publication Date:||August 2019|
|Keyword(s):||buyouts, general partner, incentives, ownership, private equity, Risk Taking, Wealth|
|JEL(s):||D86, G12, G31, G32, G34|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13944|
We examine the incentive effects of private equity (PE) professionals' ownership in the funds they manage. In a simple model, we show that managers select less risky firms and use more debt financing the higher their ownership. We test these predictions for a sample of PE funds in Norway, where the professionals' private wealth is public. Consistent with the model, firm risk decreases and leverage increases with the manager's ownership in the fund, but largely only when scaled with her wealth. Moreover, the higher the ownership, the smaller is each individual investment, increasing fund diversification. Our results suggest that wealth is of first order importance when designing incentive contracts requiring PE fund managers to coinvest.