New private equity models: How should the interests of investors and managers be aligned?

The recent global turbulence in the credit markets had a severe impact on all aspects of the private equity industry. In response, lawmakers introduced legislation that subjects fund managers to a registration requirement and provisions targeted at improving fund monitoring and accountability. Yet, little is known about the post-crisis scrutiny of private equity funds by investors. In this article, we examine the post financial crisis trends in the private equity industry. The evidence indicates that investors’ demands for the inclusion of more investor-favorable compensation terms have begun to take hold in European funds. Fund manager responsiveness to the demand for better terms seems more general, extending to increased investor control over fund investment decisions. The new pattern also reveals the inclusion of more straightforward co-investment rights. Finally, our findings suggest that, besides the contractual “improvements,” investors want to see more skin in the game from the managers/general partners.