The Levered Returns of Leveraged Buyouts: The Impact of Competition

42 Pages Posted: 1 Oct 2015 Last revised: 16 Nov 2017

See all articles by Reiner Braun

Reiner Braun

Technische Universität München (TUM) - TUM School of Management

Nicholas Crain

University of Melbourne - Department of Finance

Anna Gerl

Technische Universität München (TUM)

Date Written: July 15, 2017

Abstract

This paper investigates the relationship between leverage and returns in private equity buyout transactions. In contrast to the predictions of traditional capital structure theory, we find that transactions financed with large amounts of debt are associated higher transaction prices and lower returns to private equity sponsors. Consistent with the view that easy credit amplifies the intensity of bidding for deals, these relationships hold only when private equity buyers face competition from other funds, such as in deals sourced from investment bank auctions. Our results are distinct from changes in deal prices driven by private equity fundraising and the results are robust to alternative, plausibly exogenous, proxies for the competitiveness of deals. Finally, we show that the choice to pursue auction deals in particularly loose credit markets, when expected returns are low, is positively related to proxies for agency conflicts between fund managers and fund investors.

Keywords: Leverage, pricing, returns, competition, agency conflicts, leveraged buyouts

JEL Classification: G32, G34

Suggested Citation

Braun, Reiner and Crain, Nicholas and Gerl, Anna, The Levered Returns of Leveraged Buyouts: The Impact of Competition (July 15, 2017). Available at SSRN: https://ssrn.com/abstract=2667870 or http://dx.doi.org/10.2139/ssrn.2667870

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/

Nicholas Crain (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Anna Gerl

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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