The following are advantages of private-equity partnerships:
I.Carried interest gives the general partners potential for high profits.
II.Carried interest, because it is a call option, gives the general partners incentives to take risks.
III.There is no separation of ownership and control as general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change.
IV.There is no free cash flow problem as cash from the first round must be distributed to investors and not reinvested.
A)I, II, and IV only
B)I and II only
C)I and IV only
D)I, II, III, and IV

Question

Quizplus · Accepted Answer

Carried interest aligns the interests of general partners with the performance of the fund, encouraging them to maximize returns (I and II). The structure of private equity allows general partners to actively manage portfolio companies, addressing the issue of separation of ownership and control (III). Unlike public companies, where free cash flow might be reinvested inefficiently, private equity funds distribute returns after investments, mitigating free cash flow problems (IV).

The Following Are Advantages of Private-Equity Partnerships