FIDUCIARY DUTIES IN THE PRIVATE EQUITY AND VENTURE CAPITAL WORLD

Abstract

In many countries, private equity (PE) and venture capital (VC) are a growing part of the economy, and concerns have surfaced over how PE/VC money is managed and spent. Investors want to ensure that their investments are in good hands, while government bodies want to prevent PE/VC funds from being abused as vehicles for scams and fraud. PE/VC fund managers are often bound by fiduciary duties. In certain countries, however, no fiduciary duty is imposed, and in other countries such duties may be contractually eliminated. In such instances where managers operate without owing fiduciary duties, this raises questions about how best to protect vulnerable investors. This paper contributes to the literature on PE/VC industries and their regulation. It demystifies and describes the operation and structure of partnership-type PE/VC funds, which can be a black box to less sophisticated investors. With the basic structure outlined, the paper then highlights the critical role of specific fiduciary duties, as well as the various potential problems arising from a lack of such duties. Finally, given the increasing prevalence of PE/VC funds particularly in developing markets and the corresponding need for regulation, the paper also analyses potential solutions and safeguards that can be implemented to improve regulatory regimes.