A Theory of Liquidity in Private Equity - Vincent Maurin
Speaker : Vincent Maurin (Stockholm)
We develop a model of private equity capturing two critical features of this market: moral hazard for General Partners (GPs) and illiquidity risk for Limited Partners (LPs). The equilibrium fund structure incentivizes GPs with a pro t share and compensates LPs with an illiquidity premium. GPs may ineciently accelerate drawdowns to avoid default by LPs on capital commitments. LPs with higher illiquidity tolerance realize higher returns, leading to return persistence for both funds and LPs. With a secondary market for LP claims, fund persistence decreases, but LP persistence remains. The model can rationalize many empirical ndings and o ers several new predictions.