THE AGENCY COSTS OF PRIVATE EQUITY: WHY DO LIMITED PARTNERS STILL INVEST?

This paper examines the private equity (PE) corporate governance model by bringing together insights from legal scholarship, management studies, finance economics, and government data. While the PE business model emerged to solve the principal-agent conflicts found in large publicly traded corporations, we argue that it creates principal-agent conflicts higher up the investment chain-between the limited partner investors (LPs), or principals in PE funds, and the general partners (GPs), or agents who administer those funds. We draw on and extend multiple agency theory and examine three types of asymmetries that may undermine the interest alignment of GPs and LPs: asymmetries of power, information, and incentives. Using this framework, we consider the economic outcomes for stakeholders, whether solutions exist for better interest alignment, and the implications for future research and policy development.