How private equity-backed buyout contracts shape corporate governance
Wynant, Luc Manigart, Sophie Collewaert, Veroniek
Wynant, Luc
Manigart, Sophie
Collewaert, Veroniek
Citations
Altmetric:
Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2023-04-03
Journal
Venture Capital
Book
Publication Volume
25
Publication Issue
2
Publication Begin page
135
Publication End page
160
Publication Number of pages
Collections
Abstract
This paper explores how contracts in private equity-backed buyouts shape corporate governance in portfolio companies. Drawing upon agency theory and incomplete contracting theory, 50 actual contracts are analyzed in detail. Contracts focus on reducing adverse selection risks through limiting pre-investment information asymmetries and aligning the goals of investors and sellers. Moral hazard risks vis-à-vis management are limited through limiting post-investment information asymmetries and limiting shirking behavior through limiting free cash flows. Goal alignment is achieved through high-powered incentive structures combined with shifting risk of underperformance to management. Managerial hold-up problems are addressed through restricting share transactions and limiting managerial actions. Residual powers and contingencies are mainly used to deal with incomplete contract designs due to uncertainties. Few clauses are used to address the reverse agency problem in which management is protected against moral hazard problems created by the private equity investor. PE contracts have transparent and very strong outcome-based cash flow rights, both limiting downside risk and rewarding upside potential. This contrasts with VC contracts which are especially contingency-based given the high levels of uncertainty of the portfolio companies.
Research Projects
Organizational Units
Journal Issue
Keywords
3501 Accounting, Auditing and Accountability, 3502 Banking, Finance and Investment, 35 Commerce, Management, Tourism and Services, 3507 Strategy, Management and Organisational Behaviour