The Oxford Handbook of PRIVATE EQUITY by Douglas Cumming

The Oxford Handbook of PRIVATE EQUITY by Douglas Cumming

part i
THE STRUCTURE 
OF PRIVATE 
EQUITY FUNDS

Chapter 1
THE PRIVATE EQUITY 
CONTRACT
Steven M. Davidoff
The private equity industry has had a tumultuous time in recent years. During 
the sixth merger wave of 2004–2007, private equity dominated. In 2006, according 
to Thomson Reuters, the industry accounted for fully 18.58 percent of global take-

over volume compared to 2.55 percent in 2000. This figure rose even higher in the 
United States, to 50.6 percent of announced U.S. takeover volume during the first 
six months of 2007. This rapid ascent was negated by an equivalent hard fall during 
the financial crisis. During this later time period, private equity firms struggled 
mightily to terminate pending transactions, acquisitions that had been agreed to 
prior to August 2007 but that no longer made economic sense or otherwise lacked 
financing. Meanwhile a credit freeze and extreme market volatility inhibited new 
deal origination. In 2008 and 2009 private equity, according to Thomson Reuters 
and Dealogic, accounted for only 3.8 and 3.17 percent, respectively, of global 
takeover volume. In the first nine months of 2011, private equity had recovered 
somewhat but still accounted for only 6.5 percent of global takeover volume, a far 
cry from the heady days of 2007.
Private equity’s fall once again highlights the industry’s need for credit to 
undertake acquisitions (Yago 1990). But private equity’s recent travails have 
thrown new light onto an important aspect of private equity’s unique competi-

tive position: the private equity contract. The private equity contract is the merger 
agreement between the target and private equity acquisition fund or consortium 
of funds. This is the contract that orders the relationship of the parties during the 
time between announcement of the acquisition and its completion and sets forth 
the legal terms of the buyout

The Oxford Handbook of PRIVATE EQUITY by Douglas Cumming