Individual Assignment: Discussion Questions

Individual Assignment: Discussion Questions

Readings:

Note on Private Equity Partnership Agreements

Pawson Foundation, Aug 2005

1. Why might a Limited Partner (LP) be concerned about their General Partner (GP)’s activities not being in the LP’s best interest? Give several examples of how LPs try to address this incentive problem.

1, GP may invest significant resources in follow-on funding to salvage an investment in a poorly performing company. Because this investment leads to a high risk of portfolio, it can bring a high return at the expense of high risk, which is beneficial to GPs. However, it is not good for LPs, because this investment increase the risk of the portfolio and LPs may not be able to receive their original investment back.

2, GPs also want to leverage the fund to increase the variance of the portfolio’s return, which is not the best for LPs. Increased variance means increased risk. So, the reason is the same as the first.

3, GPs tend to co-invest with the private equity organizations earlier and/or later funds. It can lead to opportunistic behavior, which may be not good for LPs.

4, GPs are likely to reinvest funds instead of distributing profits to the LPs, because distributing profits to LPs can reduce the management fees they could receive and the reinvestment of profits may produce more profits for them.

For LPs, they have some restrictions listed in the partnership agreements to restrict the activities of the GPs.

2. Why could Mayfield (in the Pawson case) make the proposal they made in lieu of a clawback? What was their rationale? What alternatives could they have proposed?

3. As an LP, how do you feel about Mayfield’s