Determinants and modes of control in private equity agreements: exploring differentiated patterns of social control

Private equity firms take an active role in the control of invested organizations. While prior literature has examined the antecedents and consequences of contractual and corporate governance arrangements there has been almost no investigation into the organizational mechanisms used to manage the relationship with portfolio organizations. Through multiple case study analyses this study explores how control is exercised by private equity firms. The study finds that while contracting and formal governance structures are important, so too are many control mechanisms. The choice of which control to use is found to be dependent on the equity arrangement and the cognitive orientation of portfolio firm managers. Based on these determinants a framework is constructed to explain the choice of control structures. The paper also examines the interface between formal and social control mechanisms and finds differentiated patterns of social interaction depending on how formal controls are activated.