Something Money Can't Buy: The Role of Knowledge Motivation and Agency Theory in Private Equity Investments in Owner-Managed Companies

Jakob Karstensen

Student thesis: Master thesis

Abstract

Since the introduction of principal-agent theory, it has both in academic circles and in professional business environments become the dominant framework with which to understand and deal with corporate governance issues between company owners and its managers. As a result, it has been widely researched how the construction of corporate governance statutes that regulate relationship between risk and reward, monetary compensation and resulting externalities; overall the alignment of interests between the principals and its agents been widely researched. Especially within top management is the continued motivation and alignment of interests important between capital owner and managers important. The transfers of ownerships from fully owner-managed companies to externally owned companies bring principal-agent questions to the fore. How does it alter the dynamics of principal-agency relationship? How does it change the motivations of the former ownerturned manager? Specifically, in the case of large-scale private equity investments, such challenges seem all the more pertinent. As professional external ownership comes in, so is likely professional corporate governance structures which is seeking to introduce formal structures for the continued growth of the company. At the same time, the external investors are seeking to capitalize on the uniqueness of the target company and thus must try to preserve both knowledge within the organization and the motivation of part-owners staying on and company top managers. Thus, a successful transfer is key to the success of the PE fund investment and the life of the company. This leaves the period following a private equity investment in an owner-managed company especially vulnerable to missteps and bad management decisions. This thesis seeks to apply theories of agency theory, knowledge and motivation to add understanding as to why some private equity investments in owner-managed businesses fail. By referring to relevant theories it will suggest what happens to organizational knowledge and management, when an owner-managed company gets external ownership by a private equity fund. It will describe how the agency logic within private equity funds can be detrimental to the investment in the owner-managed company and how an alternative lens of stewardship theory can be helpful in understanding some of these issues. Then, by looking at 3 cases of private equity investments, it will showcase these challenges in practice.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages66
SupervisorsAllan Hansen