White Papers

Interest Alignment in the Private Equity Industry
July 2010 , Prof. Klaas P. Baks and Prof. Lawrence M. Benveniste

Abstract: In 2009 the Institutional Limited Partners Association (ILPA) assembled “The Private Equity Principles” as a positive effort to better align the interests of LPs and GPs. These principles resulted from the way the industry has evolved during the credit crisis and practices that some perceive as reflective of misalignment. Our objective in this document is to develop an economic foundation and a framework to better understand where the interests of GPs and LPs are currently misaligned as well as suggestions to mitigate those misalignments. This allows for an informed and targeted analysis of the ILPA PE principles. Our ultimate goal is to provide LPs with a better understanding of the challenges they face in relation to GPs and in so doing provide them a set of clear objectives as they consider which principles provide the greatest benefits to them. The analysis in this document supports the following main conclusions:

  1. The financial incentive structure between GPs and LPs primarily breaks down when a fund is performing poorly. Accordingly, contractual mechanisms to prevent this break down should take into account the contingent nature of the misalignment.
  2. Agency incentive conflicts resulting from activities that generate fee income (deal fees, monitoring fees, consulting fees, etc.) can be an important source of misalignment and contracts should be structured to either avoid or closely monitor them.
  3. To preserve the improvements in interest alignment currently underway, the PE market would be served well if it would transition to a clearing mechanism in which top performing GPs are rewarded with increased carried interest. The goal should be to de-emphasize management fees as a compensation channel for the GP and in the best of all worlds it should be reflective of actual costs incurred by the fund. This will avoid undue incentive for GPs to accumulate larger funds just to take advantage of the potential for profit from management fees.  

A Research Agenda for Alternative Investments: A Limited Partner’s Perspective
September 2009, 
Prof. Klaas P. Baks and Prof. Chris Rider

Abstract: This document outlines a long-run research agenda for The Emory Center for Alternative Investments based on vital issues facing limited partners. Five key areas of research are discussed: (i) asset allocation, (ii) value creation, (iii) incentive alignment, (iv) transparency, and (v) oversight, regulation & taxation. The objective of this document is to build a network of institutional investors and alternative asset managers and to secure their support to execute on this research agenda to inform our collective understanding of what alternatives do and do not do.    

The Center periodically publishes white papers. Please login and visit the member resources page to access the material.   To order copies or request permission to reproduce materials, please write to: The Emory Center for Alternative Investments, 1300 Clifton Road, Atlanta, GA 30322