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Private Equity: History, Governance, and Operations, Second Edition by ADAM A. WADECKI, JAMES P. MARTIN, LOUIS W. PETRO, HARRY CENDROWSKI

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Chapter 9

The Private Equity Governance Model

Harry Cendrowski

Adam A. Wadecki

Introduction

Private equity (PE) firms possess unique governance structures that permit them to be active investors in the truest sense of the term. Through large equity stakes, management interests in PE portfolio companies become aligned with those of all shareholders, and a sense of ambition is instilled in the executives managing these firms.

This chapter explores the PE governance model and the significant differences between it and the governance structures of public corporations. Implications for publicly traded PE firms are also discussed.

A New Model for Corporate Governance

In 1989, noted Harvard Business School Professor Michael C. Jensen wrote, “The publicly held corporation, the main engine of economic progress in the United States for a century, has outlived its usefulness in many sectors of the economy and is being eclipsed.” Jensen appropriately titled his article in the Harvard Business Review, “Eclipse of the Public Corporation.” Central to Jensen's article was the notion that PE firms, “organizations that are corporate in form but have no public shareholders,” were emerging in place of public corporations.1

In the late 1980s, the PE market was burgeoning. With the U.S. Department of Labor's clarifications to the Employee Retirement Income Security Act (ERISA) in 1979 came significant inflows to alternative asset classes. As shown in Exhibit 9.1, PE fundraising levels increased from ...

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