How Private is Private Equity, and at What Cost?

26 Pages Posted: 27 May 2009

See all articles by James C. Spindler

James C. Spindler

University of Texas School of Law; McCombs School of Business, University of Texas at Austin

Abstract

The literature on private equity ignores the impact of the securities laws. This is an oversight: key facets of private-equity structure (in particular, the limited control, liquidity, and information rights that are typical of limited partner investors) can be explained as an attempt to escape the reach of securities antifraud rules. The benefit of circumventing these rules is that doing so prevents the unwinding of optimal risk allocation between general and limited partners that would otherwise occur. This does, however, come at a significant cost, which is the exacerbation of agency costs between limited partner investors and the general partner manager; this necessitates the massive performance-based compensation that general partners receive, which is inefficient from a first-best perspective. Hence, reforming the securities laws would benefit not just public companies, but also private equity.

Suggested Citation

Spindler, James C., How Private is Private Equity, and at What Cost?. University of Chicago Law Review, Vol. 76, 2009, USC CLEO Research Paper No. C09-11, USC Law Legal Studies Paper No. 09-22, Available at SSRN: https://ssrn.com/abstract=1407146

James C. Spindler (Contact Author)

University of Texas School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

McCombs School of Business, University of Texas at Austin ( email )

Austin, TX 78712
United States

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