Contracting in private equity-backed buyouts

Abstract

Private equity (PE)-backed buyouts are transactions in which a business or business units are acquired from its current shareholders by a PE investor together with the management team (Gilligan and Wright 2014; Renneboog and Vansteenkiste 2017), and in which the PE investor typically becomes the majority shareholder. PE investors are professional investors who invest in private companies with the aim to create value in the medium term, through enhancing governance, providing strategic advice and access to networks (Manigart et al. 2022). As they rely on the management team to execute the value creation process, agency problems may arise between PE investors as principals and the management as agents (Jensen 1989). To mitigate potential agency problems, elaborate contracts are negotiated between PE investors and management, but also between the buyers and the sellers....