This article analyzes the economics of the private equity industry using a novel model and dataset. We obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1993 and 2006. We build a model to estimate the expected revenue to managers as a function of their investor contracts, and we test how this estimated revenue varies across the characteristics of our sample funds. Among our sample funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. We find sharp differences between venture capital (VC) and buyout (BO) funds. BO managers build on their prior experience by increasing the size of their funds faster than VC managers do. This leads to significantly higher revenue per partner and per professional in later BO funds. The results suggest that the BO business is more scalable than the VC business and that past success has a differential impact on the terms of their future funds. (JEL G10, G20, G24) Worldwide, private equity funds manage approximately $1 trillion of capital. About two-thirds of this capital is managed by buyout funds, where leverage can multiply the investment size by three or four times base capital. In the peak years of the early twenty-first-century cycle, these buyout funds were responsible for about one-quarter of all global merger and acquisition (M&A) activity. Venture capital funds-the other main type of private equity-raised nearly We thank of these papers addresses buyout funds-the largest part of our sample and the part with the most variation-nor do they use an option-pricing framework to value the variable-revenue components. As we will see, many of the most important conclusions are driven by variation that can be captured only in this framework. On the modeling side, Conner (2005) uses simulation to estimate the value of various pricing terms, but he takes an ex post perspective (which requires specific assumptions about fund returns), rather than the ex ante perspective taken in our article. 2 We abstract from all performance issues by assuming fixed expected performance either across all funds or as a function of fund terms.In Section 1, we discuss our data sources, define the key revenue variables used in the article, and summarize these variables for our sample funds. Our main dataset is provided by one of the largest LPs in the world, which we refer to as "the Investor." In the course of making investment decisions in private equity funds, the Investor requires potential GPs to provide information about internal fund organization in addition to providing standard documentation of fund terms. The Investor provided us access to these data for 238 funds raised between 1993 and 2006, of which ninety-four are VC funds and 144 are BO funds.In Section 2, we develop an expected-revenue model for private equity firms. Section 2.1 discusses the model for management fees, Section 2.2 discusses the model for the largest component of variable revenue ("carried interest"), and...

This paper studies the effect of bank relationships on underwriter choice in the U.S. corporate-bond underwriting market following the 1989 commercial-bank entry. I find that bank relationships have positive and significant effects on a firm's underwriter choice, "over and above" their effects on fees. This result is sharply stronger for junk-bond issuers and first-time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect. Copyright 2005 by The American Finance Association.