Private equity management: It's nothing personal
Associate Professor Berk A. Sensoy
There's a common perception that investment fund managers with little or no personal ties to the funds they manage are, in a sense, playing with house money -- that these managers, whose compensation is derived from high upfront fees rather than performance, should have some "skin in the game" in order to relate to the investors they represent.
However, a study by Fisher's Berk A. Sensoy, found that personal connections -- or the lack thereof -- between investment fund managers and their products do not impact portfolio performance.
Sensoy's research examined a proprietary database of 837 venture capital and buyout private equity funds raised between 1984 and 2009. The study found:
- Funds managed by investment managers with lower personal stakes in those funds did not underperform
- Private equity funds with high fees also did not underperform
Results of the study suggest that sophisticated institutional investors are able to invest effectively with private equity fund managers. Further, any differences in a manager's fee structure are attributable and justified by differences in his or her investing abilities.