Priceless Efficiency: Capital Allocation in the Age of Private Markets

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Zoom URL: https://uni-frankfurt.zoom-x.de/j/67101662674?pwd=lhtLNk9bz9ltHeOYCUeVtRsKFP7HYb.1
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Abstract:

A fundamental task of an economy is to allocate capital to its most productive uses. For much of the twentieth century, U.S. public stock markets performed this function at scale, aggregating dispersed information into prices through a robust institutional framework. Over the past two decades, however, public markets have contracted while private markets have absorbed a growing share of allocative activity, contributing to the widespread assumption that they can substitute for public ones. Yet private markets were not designed to perform this allocative function, nor have they been theorized as if they were. The result is a policy agenda based on an untested premise. 

This Article argues that private market allocative efficiency is fundamentally an institutional question and develops a new framework for assessing it. Tracing capital through two interfaces—from investors to funds, and funds to portfolio companies—it shows that capital allocation in private markets is disciplined by three mechanisms: public enforcement, reputation, and governance. Because public enforcement and reputational constraints are inherently limited at both interfaces, and investor–fund governance is weak in practice, governance at the fund-portfolio company interface emerges as the primary substitute for price-based coordination. This institutional account thus reveals that private governance is not merely about private parties in private deals, but about how capital is allocated in the economy. 

Still, private governance—already imperfect—is growing increasingly opaque and complex, heightening the risks of opportunism and capital misallocation. The 2024 introduction of § 122(18) to the Delaware General Corporation Law and the revival of state competition for corporate charters are deepening those risks precisely as private markets assume a more prominent role in the economy. The Article therefore cautions against expanding retail access to private markets without first strengthening their disciplining mechanisms and recasts disclosure reform as a question of governance (rather than merely financial) transparency.