Private Equity, Ownership, and Regulation

Abstract

The author shows that private equity transactions 1) illustrate market-driven reactions to inefficient equity markets that result from the diffusion of equity ownership in the public firm and 2) form part of a larger market trend toward the market-oriented blockholder model—a hybrid ownership structure that offers the benefits of monitoring associated with concentrated ownership along with the benefits of promoting liquid and efficient capital markets associated with diffused ownership. The analysis also explores the regulatory implications of the trend. In particular, the author observes that policymakers display lack of awareness of the trend. Consequently, policymakers face the hazard 1) of amplifying embedded distortions within the U.S. securities regulatory framework and 2) of introducing what the author calls regulatory systemic risk into the framework.