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Is it the Law or the Lawyers? Investment Covenants around the World*


  • We owe special thanks to a number of fund managers in 21 countries around the world for generously providing their time and data, Stefano gutti and Joe McCahery, as well as the seminar participants at the Global Finance Association (Dublin, 2005), European Financial Management Association (Milan, 2005) and Asian Financial Management Association (Kuala Lumpur, 2005). We also owe thanks to an anonymous referee and the Editor John Doukas for very helpful comments.


This paper introduces a new dataset from 50 private investment funds from 17 countries around the world. We analyse the frequency of use of investment covenants imposed by institutional investors governing the activities of private investment fund managers in areas pertaining to investment decisions, investment powers, types of investments, fund operations and limitations on liability. While the data indicate a role for country legality in affecting the frequency of use of fund covenants, the data further indicate that the presence of legally trained managers has a more pronounced role in affecting the use of covenants. As private equity and venture capital investment increases across Europe and elsewhere, our results indicate that legal practice factors will matter more than the legal setting for the establishment of covenants governing new funds.