Private equity has historically operated within a governance environment in which external capital-market scrutiny largely constrained sponsor behavior. In particular, credible “exit” events, such as initial public offerings or sales to genuinely independent acquirers, have served as recurring moments of external verification. Through exit to a third party, valuations and performance claims are tested against public information, competitive bidding, and price discovery. Exit also provides meaningful discipline by making it costly for sponsors to persist with narratives that cannot be reconciled with independently observable market outcomes.

In a new paper, we argue that this discipline has seriously weakened and that the resulting accountability deficit poses substantial risks not just for investors, but for capital allocation more broadly. At a time when private equity has become a vital force in corporate America, controlling companies with an enterprise value of approximately $20 trillion (30 percent of the S&P 500) and employing roughly 10 million workers, the erosion of accountability calls for a regulatory response that would inject accountability back into the sector—mandatory disclosure of portfolio-company financial information.

The Shrinking Role of Discipline Via Exit

Private equity has a predictable fund life cycle: Buy a company, improve it, then exit. And the last component of that formula is necessary to validate the industry’s claims about value creation.  When a portfolio company exits via IPO or an arms-length acquisition, sponsors face outside scrutiny. Valuation claims must survive external pricing and public disclosure constraints. Moreover, the need to sell companies in third-party transactions helps discipline the behavior of sponsors in buying and improving their portfolio companies.

However, exit has become less common over the past decade. In particular,  trends show longer holding periods and a shift  away from exits by IPOs or traditional arms-length sales. Rather, a growing share of exits occur through secondary transactions, often within networks of financially connected actors. Secondary deals are not inherently problematic, but conflicts can manifest when general partners of struggling funds trade assets at inflated values in reciprocal secondary transactions. And as third-party exit pathways diminish, the verification function they serve erodes as well. This reduction in accountability compounded by the three other trends: opaque and biased measures of performance, an increasing reliance on fees that are not tied to performance at all, and an influx of dollars from less discerning investors.

Analogy to Conglomerate Era

We argue that private equity without accountability runs into the same problem of hubris at scale that undermined the conglomerate movement of the 1950s, 1960s, and early 1970s—with all of the same economic risks. In the conglomerate era, management failed to create value in their assemblage of unrelated businesses, and the inadequacy of market-based mechanisms to check conglomeration led to massive resource misallocation.  Today, the same mistakes are being made at the private=equity fund level: Sponsors are assembling portfolios of diverse companies under a general claim of value creation, without providing the information necessary to evaluate those claims.  In our data collection effort, we found evidence of hundreds of funds with investments across 24 different economic sectors. Although no single person tries to oversee all of this business activity, the private equity governance model, in which specialist teams at the sponsor level interact with board members and managers at the portfolio companies across multiple business areas, raises problems of managerial capacity similar to those that cropped up during the conglomerate era.

Risk of Resource Misallocation

The private equity playbook could lead to resource misallocation and slow economic growth, just as the creation of industrial conglomerates did in the 1960s and 70s. Moreover, the scope of the economic impact would be far larger, given the massive role that PE now plays in the U.S. economy. We identify several possible areas of distortion:

• The need to manage the liquidity requirements of limited partners may produce recapitalizations at portfolio companies to generate distributions instead of further investment to develop value-increasing real options.
• The PE model’s emphasis on debt utilization could lead to underinvestment and harm growth prospects.
• The use of “NAV” loans could force portfolio companies to compete for scarce investment capacity allocated by headquarters, skewing resource allocation. That’s because NAV loans are secured by the value of a fund’s equity ownership in portfolio companies and may be used for cash distributions to the limited partners or for investment in a portfolio company that needs additional capital.

To be clear, our argument is not that private equity investments always lead to resource misallocation, simply that some percentage of them will, particularly as external mechanisms for accountability have eroded. And when those inefficiencies occur, investors and the broader public will not be aware of them under existing regulations.

Why Retail Access Creates Urgency

 The accountability deficit has become more urgent due to growing momentum to expand private equity’s accessibility to retail investors via retirement products. Retail participation can be expected to unlock trillions of dollars for private equity investors, further weakening accountability while also increasing the scope of potential harms. And the prospect of a massive influx of dollars into the industry exacerbates the risk of a bubble, whereby sponsors are able to artificially maintain high portfolio valuations through conflicted sales and opaque valuations. Even when intermediaries provide some oversight, they may have conflicts of interest that reduce the likelihood of rigorous, ongoing verification. Therefore, expanding the reach of private equity without promoting accountability risks amplifying the accountability problem we have identified.

The Solution

We offer a simple proposal to address these issues: mandatory disclosure of financial and operating results for significant private equity portfolio companies. Our article explains in detail why we believe that the SEC has authority under its existing statutory mandates to adopt such a rule, and how our proposal could be tied to the fiduciary duties of ERISA trustees as they begin to manage 401(k) accounts composed of private equity investments. Our proposed rule also rests on a practical premise: Private equity sponsors already gather the relevant information for financing, compliance, and management purposes. The incremental burden of producing standardized, public disclosures should be manageable—especially for the subset of “significant” portfolio companies where disclosure would matter most for capital allocation.

Mandatory disclosure is a way to reintroduce credible external checks without waiting for rare exit events. We do not suggest that disclosure alone solves every problem—conflicts will still exist, and markets can still make mistakes. But we argue that the current baseline assumption that verification will happen through exits is no longer reliable. Ultimately, our goal is to restore a functional feedback loop: Transparency allows performance claims to be tested, promotes incentives that align more closely with real value creation, and ensures that capital allocation better reflects what is happening in the underlying businesses. Disclosure also allows the industry to better establish that private equity is in service of value creation, benefitting investors and the broader economy.

Jeffrey N. Gordon is Richard Paul Richman Professor of Law at Columbia Law School, and Dorothy S. Lund is Columbia 1982 Alumna Professor of Law at Columbia Law School. This post is based on their new paper, “Private Equity’s Accountability Deficit: The Case for Mandatory Disclosure,” available here.