Economic Drivers of Private Equity Fund Contract Design: A Preliminary Model

This paper provides a theoretical foundation for understanding how contract structures in private equity—covering fees, incentives, and governance—shape fund behavior and outcomes. By applying a corporate finance q-theory framework, the analysis unpacks the economic forces that drive the formation of GP-LP agreements. The discussion includes how risk allocation, management fees, and carried interest align (or misalign) with long-term performance, and why certain contractual features persist despite shifts in the market. Ideal for investors, fund managers, and researchers seeking to improve contract design and mitigate potential conflicts, this paper underscores the pivotal role that robust, well-structured contracts play in enhancing returns and fostering trust in private equity relationships.

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