The GP-LP Conflict in Private Equity Funds Revisited: The Impact of Fund-Level Considerations on the Divestment Decision

43 Pages Posted: 6 May 2012

See all articles by Christian Figge

Christian Figge

Technische Universität München - Center for Entrepreneurial and Financial Studies

Oliver Bauer

Technische Universität München (TUM)

Reiner Braun

Technische Universität München (TUM) - TUM School of Management

Ann‐Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies

Date Written: May 5, 2012

Abstract

This article examines the impact of private equity (PE) fund-level dynamics on the PE fund’s general partner’s (GP) divestment decisions and whether these decisions are to the detriment of the PE fund’s limited partners, indicating a moral hazard problem. We use a unique sample of 1,112 buyout transactions realized between 1995 and 2008 which allows us to link fund and deal-level data. We find that the exit routes chosen change (i) if a PE GP is in the process of fundraising and if the PE fund (ii) has distributed comparatively little capital back to its investors. However, as related deal-level equity returns are not lower, we observe no moral hazard problem associated with these fund dynamics. In contrast, if a PE fund (iii) approaches the end of its lifetime, not only the exit route decision is affected but these exits also yield lower deal-level equity returns. We conclude that GPs do not maximize income from the current and next fund, but all future funds. Hence, they refrain from divestment decisions harming their limited partners’ returns. However, this relationship breaks down as a fund approaches the end of its lifetime and the GP increasingly focuses on managing subsequent funds.

Keywords: principal agent conflict, private equity, divestment decision, buyouts

JEL Classification: G11, G24, G34

Suggested Citation

Figge, Christian and Bauer, Oliver and Braun, Reiner and Achleitner, Ann-Kristin, The GP-LP Conflict in Private Equity Funds Revisited: The Impact of Fund-Level Considerations on the Divestment Decision (May 5, 2012). Available at SSRN: https://ssrn.com/abstract=2051441 or http://dx.doi.org/10.2139/ssrn.2051441

Christian Figge (Contact Author)

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstrasse 21
Munich, DE 80333
Germany
49-89-2892190 (Phone)

Oliver Bauer

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Reiner Braun

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, Deutschland 80333
Germany
+498928925181 (Phone)
+498928925188 (Fax)

HOME PAGE: http://www.ef.wi.tum.de/

Ann-Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25181 (Phone)

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