Agency theory has focused attention on the role conflict between the interests of managers and owners plays in a firms’ financial performance. It could be claimed that the management buy-out is the most effective weapon in the war against agency problems. This paper investigates the reasons behind the continuing popularity of buy-out funds and how they generate superior financial performance by aligning the interest of managers and investors. It follows the buy-out market from its origins to the present, and points to pitfalls for investors in a market that is now reaching maturity. In particular the popularity of buy-out funds as an investment choice has led to an oversupply of funding and signs are emerging that the market has become overheated. Deals are being done that lack the characteristics that are indicative of successful buy-out performance due to agency problems inherent in the way that buy-out funds are remunerated.
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