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A New Approach to Regulating Private Equity

33 Pages Posted: 18 Feb 2011 Last revised: 1 Dec 2011

Peter Morris

Independent

Ludovic Phalippou

University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

Date Written: February 16, 2011

Abstract

Much of the controversy around private equity has missed the point. It has focused on the relationship between private equity managers and the companies they control. Yet on average private equity managers do not seem to harm the companies they control. Meanwhile, a second key relationship has not received enough attention. This is the one between private equity managers and their investors. The reason it needs more attention is that private equity shows signs of “price shrouding” and market failure. Many people will find this idea counter-intuitive. It is widely assumed that big institutions, unlike retail investors, can “look after themselves” and always write optimal contracts. Indeed, the way financial markets are organized and regulated takes this for granted. We put forward two reasons why price shrouding may occur in private equity. We believe they are generic and may apply to other complex investments as well; and that these issues have broader relevance for policymakers.

Suggested Citation

Morris, Peter and Phalippou, Ludovic, A New Approach to Regulating Private Equity (February 16, 2011). Available at SSRN: https://ssrn.com/abstract=1762840 or http://dx.doi.org/10.2139/ssrn.1762840

Peter Morris

Independent ( email )

Ludovic Phalippou (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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