William Clayton is an Associate Research Scholar in Law and John R. Raben/Sullivan & Cromwell Executive Director of the Yale Law School Center for the Study of Corporate Law. This post is based on his recent article Preferential Treatment and the Rise of Individualized Investing in Private Equity.
Preferential treatment of investors is more common than ever in today’s private equity industry, thanks in part to new structures that make it easier to grant different terms to different investors. Traditionally, private equity managers raised almost all of their capital through “pooled” funds whereby the capital of many investors was aggregated into a single vehicle, but recent years have seen a dramatic increase in what I refer to in my paper as “individualized investing”—private equity investing by individual investors through separate accounts and co-investments. Separate accounts and co-investment vehicles are entities that exist outside of pooled funds, enabling managers to provide highly customized treatment to the investors in them. Estimates are that upwards of 20% of all investment in private equity went through these channels in 2015. Some anecdotal accounts suggest even higher levels.