Private Equity in a Deleveraged Economy: Lessons from the Financial Crisis

Abstract:     
Private Equity has been around for a number of decades but its sustainability as a model of business organization is often questioned, as its existence and functionality appears to have been inevitably tied to peculiar economic conditions. Though we never quite witnessed the eclipse of the public corporation as predicted by Michael Jensen in 1989, the period leading up to 2007 saw a tremendous rise in activities in the private equity market, resulting in an enormous amount of funds, devoted to private to public transactions. Undoubtedly, the period between 2004 and 2007 can be described as the zenith of the private equity story.

The financial crisis of the last year and a half has been long drawn and intense. The systemic risk posed by the interdependency of the global financial institutions has made the stories of financial sectors in economies across varying jurisdictions very similar. We are at an era where the days of cheap and abundantly plentiful debt are over, excessive risk taking masked as financial innovation is sought to be clamped down on and “Regulation” and “Super Regulators” appear to be the buzz word. In light of the size and undeniable importance of private equity in the world economy, the present state of the private equity market is worth exploring. In particular, how the present financial climate has affected private equity transactions and how imminent regulatory changes or a fight for survival and relevance may affect the traditional model of the private equity market in the United States. The organizational structure, management compensation arrangement and the financing structure are fundamental to the PE model. The major theme to be explored in this article is therefore what changes are ongoing or imminent in these areas.

Number of Pages in PDF File: 59

working papers series