Graduation Year

2025

Date of Submission

12-2024

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Eric Hughson

Abstract

This paper presents a novel, stylized theoretical model to analyze the conflict of interest between the General Partner (GP) and Limited Partners (LPs) within single-asset continuation vehicles, an increasingly significant yet underexplored area of private equity. At the end of a typical private equity fund, GPs can extend the life of an asset by rolling it over into a continuation fund, providing new and existing investors the opportunity to invest. The model assesses how contractual terms influence the optimal capital investment threshold for GPs and LPs. It finds that even in the absence of management fees their optimal investment threshold differs. These conflicts of interests are exacerbated by management fees, which may incentivize the GP to overinvest. Even when the GP commits 5% of their own capital as “skin-in-the-game”, the misalignment persists. To address this, the model introduces a signaling mechanisms to determine the minimum investment from the GP to align incentives and encourage LPs to invest in single-asset continuation vehicles, even when they lack knowledge about the asset’s quality. By proposing a dynamic investment threshold based on the asset’s specific risk, this framework offers a new approach to restructuring contractual terms within single-asset continuation vehicles.

This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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