PRIVATE EQUITY'S GOVERNANCE ADVANTAGE: A REQUIEM

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 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.