Abstract
Private equity funds intermediate investment and affect portfolio firm performance by actively engaging in operational, governance, and financial engineering. We study this type of intermediation in a dynamic agency model in which an active intermediary raises funds from outside investors and invests in a firm run by an agent. Optimal contracting addresses moral hazard at the intermediary and firm levels. The intermediary's incentives to affect firm performance are strongest after poor performance, while the agent's incentives are strongest after good performance. We also show how financial engineering, that is, financial contracting with outside investors, interacts with operational and governance engineering.
| Original language | English |
|---|---|
| Pages (from-to) | 2779-2836 |
| Number of pages | 58 |
| Journal | Journal of Finance |
| Volume | 78 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - Oct 2023 |
Bibliographical note
Publisher Copyright:© 2023 The Authors. The Journal of Finance published by Wiley Periodicals LLC on behalf of American Finance Association.