Private Equity's Governance Advantage: A Requiem

26 Pages Posted: 14 Oct 2019

Date Written: April 22, 2019

Abstract

Private equity’s original purpose was to optimize companies’ governance and operations. Reuniting ownership and control in corporate America, the leveraged buyout (or the mere threat thereof) undoubtedly helped reform management practices in a broad swath of U.S. companies. Due to mounting competitive pressures, however, private equity is finding relatively fewer underperforming companies to fix. This is particularly true of U.S. public companies, which are continuously dogged by activist hedge funds and other empowered shareholders looking for any sign of slack.

In response, private equity is shifting its center of gravity away from governance reform, towards a dizzying array of new tactics and new asset classes. Large private equity firms now simultaneously run leveraged buyout funds, credit funds, real estate funds, alternative investments funds, and even hedge funds. The difficulty is that some of the new money-making strategies are less likely to be value increasing than governance and operational improvements. Moreover, they introduce new conflicts of interest and complexities that alter private equity’s role in corporate governance. Private equity’s governance advantage has always been to ensure that companies are the servant of only one master. Yet today the master itself may have divided loyalties and attention. With few gains left to be had from governance reforms, private equity is quietly distancing itself from the corporate governance revolution that it helped bring about.

Keywords: private equity, corporate governance, leveraged buyout

JEL Classification: K22

Suggested Citation

de Fontenay, Elisabeth, Private Equity's Governance Advantage: A Requiem (April 22, 2019). Boston University Law Review, Vol. 99, No. 3, 2019; Duke Law School Public Law & Legal Theory Series No. 2019-71. Available at SSRN: https://ssrn.com/abstract=3462752

Elisabeth De Fontenay (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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