Should Private Equity Be Regulated?

Abstract

Private equity has become a multi-trillion dollar business in recent years, but its rapid growth has been accompanied by public controversy and calls for regulation. I review the policy debate, from voluntary best practice codes of UK private equity firms to proposals for supervision and control by continental European socialists, and analyse the economic case for regulation. I find little evidence of market failure and strong arguments for private ordering by investors, banks and labour unions, who appear to have both the ability and the incentives to safeguard against managerial conflicts of interest, excessive debt and other maladies. In contrast, it is doubtful whether politicians have sufficient information to fine-tune activity in this area, and more or less unpredictable policy changes may cause significant harm to business confidence. Altogether, the case for regulation is weak. However, if political pressures to ‘do something’ are overwhelming, as they currently appear to be, greater disclosure and transparency may be the least costly alternative.