Incetive Machanisms In Private Equity Funds

Based on the game theory and mechanism design theory, this paper studies the incentive mechanism in private equity funds(PE) from the game structure among limited partners(fund main investors) and general partners(fund managers). Subsequently, this paper analyzes the relationship between PE and the rate of technological progress in the framework of macroeconomic growth theory, and gives corresponding policy recommendations and mechanism design advice about how the government intervenes with PE markets. On the background of practice and theory research, this paper first discusses the effects of organization mechanism and distribution mechanism on incentive at the micro level, and then considers the impact of government policies on incentive at the macro level.Given the game structure of limited partners who have the money capital and general partners who have human capital(intangible asset), this paper first builds the limited partnership model, and acquires the optimal contract condition corresponding with Mirrlees-Holmstrom-Rogerson condition in company. In a limited partnership PE, the human capital will merge the money capital reversely, and solve the agent problem arising from the separation of ownership and control of money capital. Comparing with company PE, the limited partnership PE will have a higer incentive and lower agency cost. In rder to discuss the hidden information and the hidden action simultaneously, this paper futher relaxes the assumption, and can avoid the case that the incentive will be the same in the two mechanisms given the assumptions of separable contract factors. Hence, the limited partnership will be the dominant mechanism. Also, limited partnership should be adopted for excellent general partners and company PE for ordinary general partners. The mutual fusion of two mechanisms’ advantage will be the main future trend.Meanwhile, this paper researches on the relationship between distribution mechanism and incentive from the cooperative game and Nash bargaining model, and can theoretically explain the distribution rules in limited partnership agreement. Considering the weak status of limited partners, they can utilize the claw-back mechanism to protect their interests. Also, stochastic distribution mechanism will be helpful to improve the incentive and reduce agency cost.Finally, this paper tries to clean up the relationship between the government and PE. The PE, especially the venture capital funds, will benefit the path of technology transformation which represents the transformation from laboratory technology to enterprises’ practical technology. Besides macro intervention such as tax and supervision, the geverment can indirectly intervene with PE market. She only plays the role of limited partners, and guides the market to benign develop through the mechanism design.