In 1989, the late Professor Michael C. Jensen rationalized private equity buyouts as a golden bullet for the “agency costs” problem in widely held companies. However, over the course of the succeeding three and a half decades, the private equity sector has changed almost beyond recognition. Consequently, a world which in the 1980s was heavily U.S.-centric and characterized by relatively small-scale, boutique finance firms has morphed into a globalized arena dominated by very large, multi-divisional, and bureaucratically complex financial conglomerates. Notwithstanding these seismic contextual changes, the Jensenian model of private equity remains the central theoretical paradigm through which private equity buyouts are understood within law and finance scholarship.
This Article tracks the evolution of large-scale private equity firms over the past half-century, from their original guise as monoline and slim boutiques to their contemporary status as sophisticated multi-product suites. It highlights the conflict between General Partner and Limited Partner interests where fee streams become a more attractive revenue source for private equity firms than performance-based carry. It argues that this conflict encourages private equity firms to adopt an asset-gathering mentality at the expense of maximizing fund capital gains, which is a critical new agency costs problem for the sector at large. Accordingly, this Article posits that a critical reappraisal of the descriptive relevance of the Jensenian theory of private equity is now long overdue, to enable it to take account of this changed organizational context.