In this chapter it is argued that a significant part of the reason for private equity’s outperformance is its superior and sophisticated governance structures, as described in this book, with lessons for private equity practitioners, investors and policymakers, as well as academics and others with a general interest in corporate governance and corporate performance.

This chapter considers rules applicable in the UK to shareholders exercising power in their own interests, rather than the interests of the company, and asks whether these create any problems for private equity investors, in theory and in practice.It also looks at other ways in which shareholders and directors can be held liable for the actions of their companies, including Bribery Act rules, health and safety laws, competition law rules and tortious liability.

The Introduction defines and describes private equity-backed companies, explains why they matter and why policymakers are concerned about them. It explains how the book explores corporate governance mechanisms in these companies and why these might be expected to affect outcomes.The Introduction also explains that the book is focused on the UK but has global relevance.

A central question addressed in this book has been how, and for what purposes, private equity firms design governance systems for their portfolio companies and, separately, whether these systems – and the incentives of the decision-makers that populate them – make it more or less likely that private equity investors will be responsible stewards of the companies they own. In these concluding remarks, I address each of these issues in turn.

This chapter explains that a central feature of private equity governance mechanisms is a system designed to improve decision-making. Through an explanation of the typical structures seen in practice, it considers the main ways in which better decision-making is facilitated. These structures – most importantly, the board of directors of the company – differ according to the size, type and stage of development of the company, as well as the skills and expertise of the relevant stakeholders. This chapter also looks at the ways in which private equity firms seek to protect their own interests, as distinct from those of the underlying company. That question is examined from a number of perspectives, including the need for a private equity investor to sell the company within a defined time frame, and its need to protect its own reputation with a wide variety of stakeholders. Building on this analysis, and connecting in particular with the various objectives of private equity firms, this chapter considers how, if at all, private equity firms design governance mechanisms with a view to protecting external stakeholders.

This chapter examines more recent attempts to get UK companies to focus on corporate governance, including the Walker Guidelines, the AIFMD, the new Section 172 statement and the Wates Code (and related disclosure requirements).It includes an evaluation of the extent to which, and the ways in which, private equity governance systems might have to change to accommodate these new norms.

This chapter explains the main tools used by private equity firms to mitigate the “agency costs” of delegation: contractual alignment of economic interests (especially through sophisticated pay/performance sensitivity), and closer oversight through board and reporting structures.

This chapter first considers the basic structure of company law, and then looks at private equity structures in light of UK rules that prioritise the interests of the company over those of particular shareholders or their appointed director representatives.In particular, it considers the duty to promote the success of the company and the duty to exercise independent judgment – both applicable to company directors in UK law on an apparently mandatory basis.It considers some contractual responses to these rules, including some that are not currently commonly adopted.

This chapter considers the considerable theoretical difficulties posed by the UK duties to avoid conflicts of interest (Section 175 and Section 177 of the UK Companies Act). The chapter also looks at the common contractual responses to these rules and examines some theoretical problems with them.There is also an exploration of whether these theoretical problems are ever likely to create real-world problems, and suggests some ways to mitigate them, and some suggestions for policymakers.

This chapter first considers the existing academic evidence that private equity-backed companies outperform their peers and then looks at standard explanations for this outperformance.It is argued that existing explanations are inadequate.

This chapter outlines existing theories of company law and corporate governance and related insights that are used to frame the analysis in this book, including those of Adam Smith, Berle and Means, Coase, Klausner, Alchian & Demsetz, Jensen & Meckling, Hart, Roe and Bainbridge.

This chapter describes the economic incentives that are present in the private equity paradigm, and contrasts those with other ownership structures.It uses those incentives, combined with theories of the firm described in Chapter 1, to make some predictions about the behaviours of private equity investors and the mechanisms they will design for their portfolio companies.