Private Equity Firms as Gatekeepers

75 Pages Posted: 6 Apr 2013

Date Written: April 3, 2013


Notwithstanding the considerable media and regulatory attention private equity receives, there continues to be substantial confusion about what private equity does and whether this creates value. Calls for more aggressive regulation of the industry reflect a skeptical view of private equity as – at best – a zero-sum game, in which profits are generated only at the expense of other constituencies. The standard defense of private equity points to its corporate governance advantages as a source of value. This Article identifies an overlooked and increasingly important way in which private equity creates value: private equity firms act as gatekeepers in the debt markets. As repeat players, private equity firms use their reputations with creditors to mitigate the problems of borrower adverse selection and moral hazard in the companies that they manage, thereby reducing creditors’ costs of lending to these companies. Private equity-owned companies are thus able to borrow money on more favorable terms than standalone companies, all else being equal. By acting as gatekeepers, private equity firms render the debt markets more efficient and provide their portfolio companies with an increasingly valuable borrowing advantage. Ironically, then, debt may well be private equity’s greatest asset.

Keywords: private equity, gatekeeping, debt

JEL Classification: C7, D2, D6, D8, G2, G3, K12, K22

Suggested Citation

de Fontenay, Elisabeth, Private Equity Firms as Gatekeepers (April 3, 2013). Available at SSRN: or

Elisabeth De Fontenay (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics