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    Pay Now or Pay Later? The Economics within the Private Equity Partnership
    03 May 2016Working Paper Summaries

    Pay Now or Pay Later? The Economics within the Private Equity Partnership

    by Victoria Ivashina and Josh Lerner
    Partnerships are essential to the professional service and investment sectors. Yet the partnership structure raises issues including intergenerational continuity. This study of more than 700 private equity partnerships finds 1) the allocation of fund economics is typically weighted toward the founders of the firms, 2) the distributions of carried interest and ownership substantially affect the stability of the partnership, and 3) partners’ departures have a negative effect on private equity groups’ ability to raise additional funds.
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    Author Abstract

    The economics of partnerships have been of enduring interest to economists, but many issues regarding intergenerational conflicts and their impact on the continuity of these organizations remain unclear. We examine 717 private equity partnerships and show that (a) the allocation of fund economics to individual partners is divorced from past success as an investor, being instead critically driven by status as a founder; (b) that the underprovision of carried interest and ownership—and inequality in fund economics more generally—leads to the departures of senior partners; and (c) the departures of senior partners have negative effects on the ability of funds to raise additional capital.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: March 2016
    • HBS Working Paper Number: 16-119
    • Faculty Unit(s): Entrepreneurial Management
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    Victoria Ivashina
    Victoria Ivashina
    Lovett-Learned Professor of Business Administration
    Unit Head, Finance
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    Josh Lerner
    Josh Lerner
    Jacob H. Schiff Professor of Investment Banking
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