Corporate Governance Of PE Sponsors In Private To Private Leveraged Buyouts

In recent twenty years, leveraged buyouts have experienced great development in the whole world. A lot of study has focused on the leveraged buyouts. The private equity sponsored leveraged buyouts are well studied in regards to its corporate governance model in the post buyout companies. However, the study of the corporate governance of private equity are mainly based on public companies, the role of private equity in corporate governance are less studied in private firms. The theory background for the corporate governance of private equity in public firms is agency theory; private equity improves the corporate governance of the public firms through eliminating their agency problems. However, this is not the case for private firms. Different from public firms who suffer from agency problems, private firms suffer more from investment constraints. Eliminating the investment constraints the private firms suffer is the motivation for private firms to go through private equity sponsored private buyouts.This study aims to examine the corporate governance role of the private equity firms in leveraged buyouts of privately held targets. Different from public firms who suffer from agency problems, private firms are more likely to suffer from investment constraints, mitigating the inefficiencies caused by capital constraints are the main motivations for them to go through buyouts (Chuang 2011). However, agency problems serve as a solid foundation for understanding why PE firms add value to the firms. Using hand-collected datasets of 222 UK private leveraged buyouts from 2003 to 2008, I investigate the governance role of the private equity firms in reconstructing the boards, specifically its effects on board size change, board turnover and board capital.I find that PE firms are active in reconstructing the boards. After buyouts, board size of target firms increases and more insiders are fired and more outsiders are hired in PE sponsored leveraged buyouts. The presence of the PE sponsors increases the likelihood of hiring new CEO from outside as outside CEOs are more likely to implement new policies changes. Besides, director ages are found to be important factors that lead to the firing of old directors (insiders). Board capital including human capital and social capital is found to be important factors that lead to the hiring of the new directors (outsiders). Private leveraged deals with the involvement of private equity firms are more likely to fire older directors and hire outsiders with higher human capital and social capital.The corporate governance role of the private equity is important for the development of the private firms in our country. In order to get private equity investment, private firms should pay attention to the cultivation of good management team and improve the enterprise system, especially the board. After the buyout, the private firms should make good use of management experience, resources advantages and reputation of the private equity company. The current development of China’s private equity is still relatively backward, in regards of government policies, our government should create good system environment to help the development of private equity, promoting the construction of relevant laws and regulations, paying attention to personnel training of private equity expertise, building perfect exit mechanism of private equity to promote the development of private equity in China.