Hans Lovrek on private equity's ancient precedent

Hans Lovrek stumbled on Medieval Florentine documents that showed structures were being used to align interests in ventures with high information asymmetry that were uncannily similar to today’s limited partnerships.

Through a method of historical institutionalism, Hans demonstrates how the same techniques have been used to solve similar problems, down the ages, and that today’s private equity industry is based on ideas that successful trading nations have used before.

This episodes was recorded in March 2019 and is released on podcast for the first time in December 2023.

Hans Lovrek, Founder of Commenda Private Equity uncovers the historical foundations of modern private equity by analyzing medieval Florentine documents, revealing structures similar to today’s limited partnerships. His method of historical institutionalism demonstrates how successful trading nations historically addressed information asymmetry, influencing contemporary private equity practices.

Historical Parallels:

Medieval Commenda and Modern LPs: Lovrek discovered that medieval commenda contracts from the 6th to the 14th centuries share striking similarities with today’s limited partnerships (LPs), highlighting features like profit sharing, limited liability, and limited duration.

Structural Analysis:

Profit Sharing: Medieval contracts typically had a 25% profit share for the general partner (GP), akin to the 20% carried interest in modern private equity.

Limited Liability: Essential for allowing families and other investors to participate without risking their entire fortunes.

Duration: Projects were financed for specific ventures (e.g., sea voyages) with fixed terms, similar to the ten-year lifespan of modern funds.

Regulatory Influence:

Role of Regulation: Increased regulation in Venice facilitated the rise of commenda contracts by providing a framework that reduced moral hazard and ensured fairness, leading to a thriving venture investment environment.

Comparison to Modern Regulation: The historical necessity of regulation for venture success parallels modern regulatory practices, suggesting that a codified international structure could simplify private equity investments.

Due Diligence and Moral Hazard:

GP Clawback: Medieval practices included mechanisms to ensure GPs returned excess profits if investments later underperformed, a concept still relevant today.

Challenges of Information Asymmetry: Both medieval investors and modern LPs face similar challenges in monitoring GPs and ensuring aligned interests.

Medieval Foundations of Modern Private Equity – Hans Lovrek on Fund Shack’s Private Equity Podcast

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