The Economics of Private Equity Funds
The Review of Financial Studies, 2010
This article analyzes the economics of the private equity industry using a novel model and dataset. Metrick and Yasuda obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1993 and 2006. They build a model to estimate the expected revenue to managers as a function of their investor contracts, and test how this estimated revenue varies across the characteristics of our sample funds.
Among their sample funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. They 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.