A Theory of Liquidity in Private Equity
Abstract
We develop a model of private equity in which many empirical patterns arise endogenously. Our model rests solely on 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 share in the fund and compensates LPs with an illiquidity premium. GPs may inefficiently accelerate drawdowns to avoid default by LPs on capital...
Paper Details
Title
A Theory of Liquidity in Private Equity
Published Date
Jan 1, 2020
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