Accell Partners Hbs Essay

1121 Words Mar 5th, 2013 5 Pages
Accel Partners VII Analysis

The Private Equity Partnerships (PEPs) agreement contains mechanisms to align the interest of general partners (GPs) with those of the limited partners (LPs): performance incentives and direct means of control. In the case of Accel VII, we are interested in how the performance incentives align both the interest of the general and limited partners. They include the terms of the general partners’ compensation structure and calculations of management fees and carried interest. These details can significantly affect the general partners’ incentive to engage in behavior that does not maximize value for investors.
In a typical incentive structure, Private Equity Partnerships often use an 80/20 profit-sharing rule
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Thus, Accel proposed a premium carry for their seventh fund. Management fees remained constant, however, as they are paid regardless of performance so therefore does not incentivize GPs to work hard. Consequently, Accel claims that “the higher profit share would help it retain and attract new talent,” evident by the recent additions of Bruce Golden and Mitch Kapor into the firm. Accel also believes that top performers should be rewarded adequately. The conviction is that “it is better to invest with a strong team and have mediocre terms, than to invest with a mediocre team and have strong terms.” Therefore, the company justifies that its elite track record of consistently outperforming a typical venture fund deserves a carried interest of 30% rather than 20%. This argument suggests that carried interest is not a zero-sum game where the gain or loss of LPs are offset by the loss or gain of GPs. The higher expected returns from funds imply a higher price, so there is a premium carry to invest in these proven performers like Accel. Successful VC firms oftentimes are oversubscribed, so the supply and demand leaves investors with little leverage to negotiate terms. As shown in Exhibit 1, the increasing trend of the maximum returns since 1994 implies that these high returning funds vastly outperform the average returning funds, which is much more volatile in

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