7

Private Equity and Ethics

A Culture Clash

It is no small claim to make that until the emergence of private equity as a modern financial sector (see Chapter 2), there would have been no reason to write this chapter at all. Prior to that the subject of ethics was either aligned with entrepreneurial spirit through what Adam Smith described as ‘acting in one’s and at the same time the general public’s best interest’; or was associated with religious and political endeavours and had no chance to be assessed separately – and even less to be debated.

The emergence of the rule of law has separated practices which used to be connected, such as setting the rules and benefiting from them at the same time; or the roles of manager and controller being combined in one person. The professionalisation of private equity has also introduced separation between principal and agent (see Chapter 2), which has increased the potential for conflicts of interest.

The list of potential malpractices would be very long and it is not the purpose of this chapter to list them all, but to understand their dynamics, make an attempt at classification and derive some lessons from them. Private equity being a small and mainly local activity until 20 years ago, limited and general partners would know each other well. The sanction of an ethical breach would be simply the exclusion of the private equity sector, as word spread fast amongst the community of private equity stakeholders. With a massive influx of capital, ...

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