How To Manage Conflicts Of Interest In Private Equity?
Explanation
Directors nominated by private equity (PE) sponsors have a unique position—but it’s important to note that their legal duties extend beyond serving the interests of the sponsor alone.
Under UK law, particularly the Companies Act 2006, these directors owe their duties to the company as a whole, including all shareholders—not just the nominating PE firm.
Situational Conflicts
A key legal requirement is to avoid “situational conflicts”, where a director’s interests may conflict (or appear to conflict) with the interests of the company they serve.
For example, a situational conflict could arise if a director also sits on the board of another portfolio company that operates in the same sector, or has interests that are potentially adverse to the first company.
In such cases, these conflicts can be managed and authorised by the non-conflicted directors of the company. It is standard practice—and legally advisable—for nominated directors to seek this type of authorisation where relevant.
Transactional Conflicts
Directors may also face “transactional conflicts”, which occur when they have an interest in a specific deal or arrangement the company is considering.
When this happens, directors are generally required to declare their interest in the transaction. This declaration ensures transparency and allows the board to take appropriate steps.
Once an interest has been disclosed, whether or not a director can participate in decision-making will depend on the company’s articles of association.
In many cases, these articles allow directors to continue participating in decisions, even where a conflict exists—as long as proper disclosure has been made.
Key Takeaway
Nominated directors can navigate both actual and potential conflicts effectively by:
• Understanding their broader fiduciary duties
• Seeking authorisation for situational conflicts
• Disclosing transactional conflicts clearly and promptly
• Following the company’s governing documents, such as its articles of association
By taking these steps, PE-nominated directors can fulfill their responsibilities both to the companies they serve and to the PE firms that appointed them—while remaining compliant with UK corporate governance standards.
View More Definitions & Explanations
The Origins and Evolution of Private Equity
Private equity (PE) has grown into a global financial powerhouse, but its beginnings can be traced back to the post-World War II era. The formation of the American Research and Development Corporation (ARDC) in 1946 marked one of the earliest institutional private equity efforts.
ARDC’s mission was to fund companies that could repurpose wartime technologies for commercial use. One of its landmark investments was in Digital Equipment Corporation (DEC). A modest $70,000 investment in DEC eventually turned into $355 million, delivering a return of over 5,000 times the original amount. This staggering success demonstrated the potential of private equity to fuel innovation and drive extraordinary financial outcomes.
The Rise of Leveraged Buyouts in the 1980s
The 1980s became a transformative decade for private equity, largely due to the emergence of leveraged buyouts (LBOs). Pioneering firms such as Kohlberg Kravis Roberts (KKR) led this movement, acquiring companies primarily through borrowed capital, implementing operational improvements, and exiting through strategic sales or IPOs. These deals often resulted in significant returns and played a key role in legitimizing private equity as a powerful tool for value creation.
Private Equity Today: A Global Asset Class
Fast-forward to today, and private equity has evolved into a multi-trillion-dollar global industry. PE firms are actively involved in reshaping key sectors, including technology, healthcare, financial services, energy, and consumer goods. The United States continues to dominate the market, but institutional investors are increasingly turning their attention to opportunities in Europe and Asia where valuations are more attractive and growth potential remains robust.
In recent years, PE has also embraced thematic and impact investing. Many funds are aligning their strategies with ESG (Environmental, Social, and Governance) principles or specific global trends, such as digital transformation, renewable energy, and health innovation. This not only broadens investor appeal but also enhances the sector’s influence on global progress.
The Dominance of Private Companies
One compelling statistic underscores the importance of private markets: approximately 83% of U.S. companies with over $100 million in revenue remain privately held. This highlights the vital role of private equity in financing, developing, and scaling enterprises outside the public markets.
In summary, private equity has evolved from a niche investment strategy to a dominant force in global finance. With its origins in innovation and a future driven by strategic investment, operational excellence, and global diversification, PE is positioned to remain a key player in shaping tomorrow’s economy.
