Pay For Performance From Future Fund Flows: The Case Of Private Equity

Lifetime incomes of private equity general partners are affected by their current funds' performance through both carried interest profit sharing provisions, and also by the effect of the current fund's performance on general partners' abilities to raise capital for future funds. The authors present a learning-based framework for estimating the market-based pay for performance arising from future fundraising. For the typical first-time private equity fund, they estimate that implicit pay for performance from expected future fundraising is of approximately the same order of magnitude as the explicit pay for performance general partners receive.