Monday, September 29, 2008

VU Profs argue Private Equity more vigilant in new financial world

Over the weekend, two Vanderbilt University professors updated their report, "Does Private Equity Create Wealth?" The study from Owen GSM Prof. Ron Masulis and VU Law School Prof. Randall Thomas reveals that boards of directors and management teams in companies owned by private-equity funds have advantages over public companies when it comes to monitoring financial risk and performance. Say the authors, PE execs "can do a better job of monitoring of derivative transactions and derivative contract positions than their public company counterparts..." They explained at another point in the 56-page report, "Unlike public companies, boardroom activity in [leveraged buyout] firms is less concerned about regulatory compliance, committee work, and process... There is better information available to top management and board level because of initial extensive due diligence and because of the more intense operational focus... Moreover, there is a different social dynamic on the board, so that anything can be discussed and all assumptions are subject to reconsideration...." The paper offers an interesting discussion of management incentives to create shareowner value. Masulis' research is focused on M&A activity and corporate governance. The 56-page Masulis-Thomas report is here (pdf).

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