The Risk Appetite of Private Equity Sponsors

35 Pages Posted: 19 Jan 2011 Last revised: 25 Aug 2019

See all articles by Reiner Braun

Reiner Braun

Technische Universität München (TUM) - TUM School of Management

Nico Engel

Technische Universität München - Center for Entrepreneurial and Financial Studies

Peter Hieber

University of Ulm - Department of Mathematics and Economics; Catholic University of Louvain (UCL)

Rudi Zagst

Technische Universität München (TUM) - Chair of Mathematical Finance

Date Written: June 9, 2011

Abstract

Using a unique proprietary data set of 460 realized buyouts completed between 1990 and 2005, we examine the risk appetite of private equity (PE) sponsors in different states of the PE market and analyse key determinants of deal-level equity risk. We develop a new approach to mathematically model PE investment equity risk based on the Black-Cox default model. We find higher equity volatilities during boom periods. Further, deals conducted by more reputed PE sponsors have lower equity volatilities as they are unwilling to imperil their reputation by taking excessive risks. In addition, we find that PE sponsors' risk appetite is negatively related to the ownership stake in the buyout target company.

Keywords: Risk Appetite, Equity Volatility, Private Equity

JEL Classification: G24, G30, G32, G34

Suggested Citation

Braun, Reiner and Engel, Nico and Hieber, Peter and Zagst, Rudi, The Risk Appetite of Private Equity Sponsors (June 9, 2011). Journal of Empirical Finance, Vol. 18, No. 5, pp. 815-832, Available at SSRN: https://ssrn.com/abstract=1742309

Reiner Braun

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, Deutschland 80333
Germany
+498928925181 (Phone)
+498928925188 (Fax)

HOME PAGE: http://www.ef.wi.tum.de/

Nico Engel (Contact Author)

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Peter Hieber

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Rudi Zagst

Technische Universität München (TUM) - Chair of Mathematical Finance ( email )

Parkring 11
Garching-Hochbrueck, 85748
Germany
+49 89 289 17400 (Phone)

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