The Capital Structure of Private Equity-Backed Firms
Posted: 6 May 2009 Last revised: 18 Oct 2011
Date Written: April 1, 2009
In this paper we study one fundamental tension between private equity fund and management in private equity-backed firms and show that capital structure (of private equity-back firms) is a mechanism to resolve the tension. The paper offers rationale for several characteristics of private equity investment. We show that buyout deals of private equity need to be partially leveraged even though private equity fund may not be financially constrained at the deal level. Furthermore, we show that there exists an optimal level of leverage in buyouts and the maturity of debt of leverage is long-term. The paper implies that capital structure decisions of private equity-backed firms are quite different with public firms.
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