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Reducing Conflicts of Interest in Private Equity Funds Via Compensation Package

Kamrani Mousavi, Amir Hossein | 2023

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 56484 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Hajizadeh Saffar, Iman; Tajeddin, Golnaz
  7. Abstract:
  8. In Private Equity funds, the manager (known as general partner) collects funds from the investors (known as limited partners) and invests them over a certain time horizon. Assuming that both parties seek to maximize their interests, a situation arises in which the manager does not consider the best interests of the investors. The manager's compensation package is one of the important parts of corporate governance, which consists of four components: management fee, performance based fees (or carried interest), hurdle rate and proceeds distribution method. In this research, first by conducting a semi-structured interview with 15 experts in the PE ecosystem and publishing a questionnaire, the scenarios in the literature which lead to conflicts of interest were ranked based on their importance. After extracting the compensation mechanisms mentioned in the literature, by conducting another stage of semi-structured interview and publishing the questionnaire, the effectiveness of each element of compensation package on resolving the conflicts of interest was evaluated. In addition to sorting conflicts of interest scenarios based on their importance and other contractual considerations, it was found that, from the experts' point of view, a "management fee based on the net invested capital", a "carried interest based on fund’s gross performance", a "hurdle rate based on the return of stock market index" and a "proceeds distribution in a hybrid form" is the best compensation package that can control the most important conflicts of interest and be the basis of negotiations between investors and the manager
  9. Keywords:
  10. Investor ; Agency Problem ; Interests Conflict ; Hurdle Rate ; Fund Manager ; Compensation Package ; Carried Interest

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