Essays on Private Equity

This dissertation studies the incentives of private equity (PE) fund managers. In the first chapter, I study how the management fee structures of funds shape their incentives. I find that one of the most common management fee structures in the industry - changing fee bases at the end of the investment period from committed capital to invested capital - creates an agency problem where the managers overinvest to receive more management fees. Importantly, this finding implies that that the investors face a trade-off when choosing this fee structure. Changing fee bases in this way reduces management fees, but it also creates an overinvestment problem.

In the second chapter, I examine what determines the nature of the operational changes that the PE fund managers bring to their portfolio companies. In the context of PE ownership of nursing homes in the U.S., I find that the PE fund managers improve quality of care of their nursing homes by hiring more skilled nurses, but only at the nursing homes in competitive markets. In contrast, in concentrated markets, PE fund managers fire nurses which lowers quality of care. Overall, this chapter shows that the competition in the product market largely shapes the effects of PE ownership on consumer welfare. Importantly,this finding implies that policy makers may use pro-competition policies to assuage negative effects of PE ownership on consumer welfare. Consistent with this finding, this chapter shows that PE-owned nursing homes responded more strongly to the introduction of the star-rating system at the end of 2008.

In the final chapter of this dissertation, I examine how the incentives of the PE fund managers change in times of crisis. To do this, I examine the effects of PE ownership on nursing homes during COVID-19. In the media, there were several accusations that the PE investors make nursing homes more vulnerable to COVID-19. This chapter shows that PE-ownership is actually associated with a lower likelihood of having a COVID-19 outbreak, and a lower likelihood of nursing homes being short of Personal Protective Equipments for their nurses and patients. These findings are consistent with the view that PE investors help their portfolio companies survive through crises by bringing both management expertise and capital injections to their portfolio companies.