Contracts and Returns in Private Equity Investments
36 Pages Posted: 18 Dec 2009 Last revised: 29 May 2013
Date Written: July 18, 2012
We analyze the relationship between contracts and returns in private equity (PE) investments. Contractual control in the form of covenants tends to be employed to identify good deals. Better quality firms are more likely to have covenant-rich contracts, as they are less concerned by the constraints imposed by the covenants. PE investors appoint closer associates of the fund in deals that are performing poorly but tend to outsource board governance in better deals. Collectively, our evidence suggests that PE investors operate along two dimensions, choosing covenants and board seats differently, based on the ex-ante quality of the company.
Keywords: private equity funds, venture capital, IRR, covenants, board directors
JEL Classification: G11, G23, G24
Suggested Citation: Suggested Citation