Private equity (PE) firms are financial intermediaries standing between the portfolio firms and their investors. They are typically organized as closed-end funds aiming to overcome informational asymmetries and to exploit specialization gains in selecting and overseeing portfolio firms.' However, their existence as financial intermediaries creates new informational asymmetries (with respect to the investors in the PE funds). Fund managers raise follow-on funds before exiting their investments, and may have incentives to overvalue their as-yet-unsold investments when making disclosures to institutional investors. Despite strong incentives to overvalue, PE funds do not face mandatory disclosure rules in any country with a significant PE industry.2 Yet the overvaluation of unexited PE investments has the potential to distort capital allocations to the PE industry generally, and across PE funds in different countries around the world. Disclosure of performance to the investor is burdened by two main difficulties. On the one hand, valuation requires sufficient information on the performance of the firm; on the other hand, even if sufficient information is available, PE firms may disclose information strategically. The main aim of this Article is to discuss these two issues in detail.

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