Book Review: Corporate Governance and Responsible Investment in Private Equity

Responsible investment in corporate governance and personal equity. 2021. Simon Whitney. Cambridge University Press (International Corporate Law and Financial Market Control Series).

Personal equity as an investment class is older than many reading this review. It is a fast-growing part of the investment universe compared to publicly listed companies, which is declining in number. Simon Whitney presents the first of its kind investigations into the workings of corporate governance and private liability investing, focusing on the (mostly) institutional investor monitoring efforts as well as the legal responsibilities of managers and board of directors. Equity and how the two functions really work together. Whitney is a visiting professor in practice at the London School of Economics and Political Science and has been a personal equity lawyer for over 20 years.

Investors can go through many things that emphasize corporate governance. This has far-reaching implications for advanced investment practices. The author defines corporate governance in private equity as a set of rules that govern who makes decisions in private equity-backed companies, in whose interests decisions are made, and who governs the process of creating them. According to Invest Europe, private equity firms represent themselves as their active capital, demanding strict accountability, transparency and the best practices by their portfolio companies. (Formerly known as EVCA or European Private Equity and Venture Capital Association, Invest Europe represents the private equity community across Europe.) They are often sector experts, employees who bring specific skills. Most importantly, they have special discussions on governance when they invest.

Bespoke agreements on private equity-backed investments enable close coordination of interests with self-reliant agency conflicts, a informed and influential shareholder, and significant incentives to effectively organize good governance. The agreement in question, according to the author, is helpful in determining the governance system applicable to private equity-backed companies. The main purpose of the agreement is to facilitate effective oversight of management, improve decision-making standards and ensure that investor preferences are taken into account.

In the context of a private equity reputation, proactive governance is essential because some regulators and members of the public misunderstand private equity operators as asset snatchers, debt loaders and unemployed creators. The author cites the September 2017 toy “R” as a tragic example of our bankruptcy, where private equity ownership was blamed by the press and certain politicians for the company’s huge debt and stable interest costs. Many politicians express such criticism, to the detriment of private equity operators, who actually practice good business, seeing high returns on assets and profitable cash-outs over a period of time.

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Readers outside the UK and the eurozone will be amazed by the application of the largest single section of the book “Corporate Governance Regulation and the Response to Private Equity in the UK”. It focuses on the Companies Act of 2006 with a special focus on the responsibility of fidelity, which has been described as an obligation to promote the success of the company. The second important aspect of the responsibility of loyalty is that managers must exercise “independent judgment”. The content of the 2006 Companies Act may be considered a default regulation, although it is clearly not favorable for a private equity-backed company that has a contractual agreement with legal effect. The discussion also addresses European competition law; The Guidelines for Alternative Investment Fund Managers (AIFMD), consist of legal responses designed to mitigate systemic risks following the 2007-2008 financial crisis; Walker Guide; And Watts principles (more on that below).

In 2018 the UK government created a “model of governance and monitoring”. Sir James Waits CBE was commissioned to develop policies that could be applied to form the corporate governance of large private companies. To me, these high-level policies incorporate the message of the book and can be shortened to serve smaller companies. These policies include the following:

  • An effective board that develops and promotes the company’s objectives
  • Forming a functional board that requires an effective chair and a balance of skills, background, experience and knowledge
  • Responsibilities and responsibilities of managers
  • Promoting the company’s long-term, sustainable success
  • The remuneration of the board is linked to that success.
  • Effective stakeholder relationships
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The fourth part (the final section of this tidy volume) examines how corporate governance can affect corporate performance. Some academic studies cited by the author show that portfolio companies outperform their listed partners in terms of profitability, productivity, employment and effective capital management. These metrics potentially provide strong arguments for investing in personal equity-supported vehicles. Whitney, however, notes that many studies of performance need to be updated, especially for the current decade.

In short, readers – especially regulators, company management and investors – will find answers to many of their questions about effective governance and responsible investment in private equity in this comprehensive lesson. Most individuals will take the information provided as an argument for their confidence in private equity-backed investments.

The big question, though, relates to parallel governance and control in their own country. Is the rule of a given country like weak tea, or is it strong, effective and enforceable? In the United States, how do the Dodd-Frank regulations compare to the rules presented here? Will the “Stop Wall Street Looting Act” (a bill introduced in the U.S. Congress in 2019) gain more momentum or become unnecessary with the rise of effective corporate governance and responsible investment in private equity?

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

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Janet J. Mangano

Janet J. Mangano, formerly a senior portfolio manager at PNC Wealth, in Short Hills, New Jersey.

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