The Public Cost of Private Equity

58 Pages Posted: 19 Apr 2017 Last revised: 20 May 2017

William J. Magnuson

Texas A&M University School of Law

Date Written: April 19, 2017

Abstract

This Article presents a theory of the corporate governance costs of private equity. In doing so, it challenges the common view that private equity’s governance structure has resolved, or at least significantly mitigated, one of the fundamental tensions in corporate law, that is, the conflict between management and ownership. The Article argues that this widespread perception about the corporate governance benefits of private equity overlooks the many ways in which the private equity model, far from eliminating agency costs, in fact exacerbates them. These governance costs include compensation structures that incentivize excessive risk-taking, governance rights that provide investors with few avenues for effective information and control, and side agreements that allow for differential treatment of investors. Together, these arrangements create opportunities for private equity firms to extract rent from portfolio companies at the expense of their investors. After identifying the source of these problems, the Article proposes a set of reforms aimed at reducing the misalignments within the industry.

Keywords: corporate law, private equity, corporate governance, financial law, contract law

JEL Classification: K10, K12, K2, K22, L2

Suggested Citation

Magnuson, William J., The Public Cost of Private Equity (April 19, 2017). Minnesota Law Review, Vol. 102, 2017 Forthcoming; Texas A&M University School of Law Legal Studies Research Paper No. 17-28. Available at SSRN: https://ssrn.com/abstract=2955175

William J. Magnuson (Contact Author)

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX 76102
United States

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