Bank Affiliation in Private Equity Firms: Distortions in Investment Selection
California State University, Fullerton
August 29, 2015
Private equity firms that are affiliated with banks have become major players in the industry, raising billions of dollars in funds. Yet, the literature and anecdotal evidence imply that leveraged buyouts (LBOs) carried out by these affiliated firms would underperform independent LBOs. This paper studies these deals from the perspective of target performance. I find that bank-affiliated LBOs have no positive effect on the target firms' operating performance. Furthermore, I investigate whether the implied underperformance is due to problems in managing or selecting investments. In doing so, I find that targets of bank-affiliated LBOs and independent LBOs differ systematically in size, profitability, liquidity, and risk. Moreover, targets of bank-affiliated LBOs do not underperform similar targets of independent LBOs. Instead, all firms that have the characteristics of targets of bank-affiliated LBOs show worse operating performance. These findings cannot be attributed to the private equity market cycle or a skill-based explanation. The overall results are consistent with the view that bank affiliation does not benefit the target firms due to distortions that affiliated firms face in selecting investments.
Number of Pages in PDF File: 48
Keywords: private equity, banks, leveraged buyout
JEL Classification: G23, G24, G34,
Date posted: December 16, 2012 ; Last revised: September 28, 2015
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