When a Private Equity Manager Underperforms

In a private equity firm, the limited partners are the investors and the general partner is the fund manager.  Since the portfolio is generally illiquid, the investors cannot sell the fund for a fair price if it is underperforming.  They may sell it on the secondary market at a discount.  Here are some other actions that they may take:

• The investor may decline to invest in the manager's next fund
• The investor may negotiate to reduce the size of the next fund or have the manager address the issues causing the underperformance
• The manager may lower the management fees
• The investor may threaten legal action or fire the manager in extreme cases
• The investor may default as a last resort