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Private Equity Institute

Private Equity Portfolio Company Fees

Ludovic Phalippou, Christian Rauch and Marc Umber

A less known fact about private equity is that General Partners (GPs) enter 'service agreements' specifying fee payments by companies whose boards they control. We describe these contracts and find that related fee payments sum up to $20 billion evenly distributed over twenty years, representing over 6% of the equity invested by GPs on behalf of their investors. Fees do not vary according to business cycles, company characteristics, or GP performance. Fees vary significantly across GPs and are persistent within GPs. Once these fees become public information GPs charging the least to companies raised significantly more capital. GPs that went public distinctively increased their fees. We discuss how results can be explained by optimal contracting versus tunneling theories.