From Governing to Managing: Exploring Modes of Control in Private Equity Relationships

Abstract

Private equity (PE) firms take an active role in the control of invested organizations. However, despite the growing economic importance of PE financing, there has been limited investigation into the control mechanisms used to manage these relationships. Most prior research examines PE as an alternate structure of governance, typically in comparison to governance of publicly owned firms, without providing detail on the actual mechanisms used in managing these relationships. Through multiple case study analyses this study explores the forms of control that are exercised by PE firms and the factors associated with their relative importance in the PE relationship. The study finds that while financial contracting plays an important role for control, there is significant variation in the formal control mechanisms that PE firms employ. Additionally, some PE firms rely heavily on social mechanisms to achieve control outcomes. The study points to some of the factors that are related to these differences, and thus provides an initial framework for understanding variation in the control of PE relationships.