Agency Issues Between Private Equity Firms and Portfolio Companies Lead to Conflicts

The relationship between private equity (PE) firms and their portfolio companies is shaped by agency theory, which examines conflicts of interest between principals (PE investors) and agents (portfolio company executives). While PE ownership often reduces traditional agency problems by introducing active oversight, it also creates new challenges.

A study by William W. Bratton, Private Equity’s Three Lessons for Agency Theory, highlights how PE’s focus on short-term financial gains can pressure CEOs into high-risk strategies that may not support long-term stability (Read the study). The study explores how PE firms, with their concentrated ownership, exert significant influence over management teams, often leading to a focus on financial engineering and aggressive cost-cutting rather than sustainable growth. Bratton also argues that while active PE oversight can enhance efficiency, it may also create misaligned incentives, particularly when portfolio company executives are pressured to meet investor expectations at the expense of operational resilience and long-term strategic vision.

At Portobello Advisory, we understand these dynamics because we’ve been both PE professionals and executive coaches. We help portfolio company leaders navigate investor expectations, improve board communication, and align short-term performance goals with long-term value creation.

If your firm is struggling with the complexities of PE ownership, let’s talk. Coaching can bridge the gap between investor demands and sustainable business success.