I am a big fan of the Economist, I really think they give a fair view of events in business and finance. That is why I was shocked when I was reading the last issues ( week of thanksgiving 2009). In an article about PE/VC and Hedge funds the writer was talking about the compensation of partners in those funds. I don’t remember the exact wording but basically the article made the point that partners have no conflict of interest with investors in the fund since partners only get paid if they produce returns for investors.
How about the argument that partners get rewarded if they produce results but do not get penalized if they loose investors money and as such partners are incentivized to take on risk investors normally would not take on! There has been tons of pages written regarding that same argument since the crisis hit. Even non-finance publications have spelled this out for the non-finance reader. Have the writers of the economist just not been following the press?
Believe me I am not making the argument that PE/VC partners (LPs) are dishonest or are out for their own etc. All the partners I have worked with have been nothing but honest and very careful with their investors money.
BUT that does not mean that there is not an issue of misaligned incentives with the compensation of partners. Now some funds require partners to put in their own money into deals, which would minimize the misalignment of incentives. But the Economist does not mention that at all.
Am I missing something here? Was this just a one-off mistake that the Economist will not make anymore ?
