Beware of Venturing into Private Equity

Ludovic Phalippou

Journal of Economic Perspectives, 2009, vol. 23, issue 1, 147-66

Abstract: As a step towards understanding whether a private equity governance structure reduces overall agency conflicts relative to a public equity governance structure (as is often argued), this paper describes the contracts between private equity funds and investors, and the returns earned by investors. The paper sets the stage with a puzzle: the average performance of private equity funds is above that of the Standard and Poor's 500 - the main public stock market index - before fees are charged, but below that benchmark after fees are charged. Why are the payments to private equity buyout funds so large? Why does the marginal investor invest in buyout funds? I explore one potential answer (and probably the most controversial): that some investors are fooled. I show that the fee contracts for these funds are opaque. Considering this and the way that compensation contracts bury, in details, costly provisions that are difficult to justify on the basis of proper incentive alignment, it would be premature to assert that the agency conflicts are lower in private equity than in public equity.

JEL-codes: G23 G24 G32 G34 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/jep.23.1.147
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.1.147 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:jecper:v:23:y:2009:i:1:p:147-66

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

Journal of Economic Perspectives is currently edited by Enrico Moretti

More articles in Journal of Economic Perspectives from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().