Concepts of good contracting in view of (non)successful private equity-backed buy-outs.

Buyouts by private equity firms as “an increasingly important phenomenon of the contemporary corporate landscape” (Kaul, Nary and Singh (2017)). Private equity is a form of equity investment in mature private (i.e. not listed on the stock exchange) companies with stable cashflows. It is a medium to long-term investment, characterized by the concept of active ownership (Bruining, Verwaal and Wright (2013)). Private equity builds better businesses by strengthening management expertise, delivering operational improvements and sustaining growth in the value of the underlying business. Over the past decades, a substantial academic literature on private equity backed buy-outs has arisen (Gompers, Kaplan and Mukharlyamov (2016); Guo, Hotchkiss and Song (2011); Kaplan and Strömberg (2009)). Notwithstanding the academic debate and literature in relation to private equity backed buyouts, it is surprising that the relation between the contract design and the performance of private equity investments has seldom been explored in academic research. In contrast to the theoretical frameworks developed by researchers and certainly from an empirical viewpoint, there is a gap in the literature with regard to the relationship between contract design and returns in private equity backed buy-outs.