Regulation of Private Equity in the U.S. Reveals Deep Problems for Investors

Abstract

Probably no one is more shocked than the partners in the 3,300 private equity fi rms headquartered in the U.S. to learn that the weak oversight of their activities mandated in the wake of the recent fi nancial crisis may have actual consequences for them. About 1,100 partners in these private equity fi rms serve as the General Partners (GPs) of the PE investment funds their fi rms sponsor. These GPs are advisors to the PE funds and make all decisions about the funds’ investments. Public sector and private pension funds, university endowments, sovereign wealth funds and very wealthy individuals are the Limited Partners (LPs) or investors in the PE funds. They typically commit 98 percent of the capital in a PE fund, with the GPs (i.e. the PE fi rm partners) contributing the remaining two percent. The LPs pay management fees to the GPs for managing the fund and its investments.