Exploring agency risks and governance between institutional investors and fund managers in private equity

Abstract

In this study, the relationship between Fund Managers and Investors in private equity is explored. This relationship is fairly under-researched in the literature, and the purpose of this research was to launch an exploratory study intended to motivate future research in this field. The study was predicated upon a structured framework established using Agency Theory as a theoretical basis to conceptualise the underlying relationship. Agency Theory was used to formulate key themes upon which to structure and research key areas of the agency relationship. These were: selection; alignment of interest, governance mechanisms and agency conflicts. The research design was incorporated in the context of a Development Finance Institution as a single-case study, with six private equity funds as multiple embedded units within the context. In particular, the relationship was explored to understand how investors and fund manager of private equity are selected; how alignment of interests are achieved through incentive structures and partnership agreements; how agency conflicts manifest, and how decisions are made via key governance structures in the Fund. Furthermore, a number of agency predictions were validated in the context of the relationship.