Topics in Corporate Finance (18) Regulating Private Equity

Abstract

Private equity plays an important role in the financing of the corporate sector. An important issue is the attractiveness of this asset class to investors. That is, how well have private equity funds performed for their investors? The importance of private equity is undeniable, and the returns that are available to investors will in part determine its future success. Against this backdrop the Amsterdam Center for Corporate Finance (ACCF) has decided to devote this issue of its discussion series "Topics in Corporate Finance" to this important topic. Ludovic Phalippou, an associate professor of the University of Amsterdam, is one of the key researchers in this area. His research, reflected in this booklet, raises some points of concern. In particular, he concludes that the average private equity fund performs below reasonable (i.e. risk-matching) benchmarks. Fees paid by investors are high even when performance is below these benchmarks. Moreover, the contracts between private equity firms and their investors do not align interests, i.e. induce potential conflicts of interest. Professor Phalippou proposes some carefully crafted general guidelines for regulation.