Bank Affiliation in Private Equity: Distortions in Investment Selection
California State University, Fullerton
November 15, 2012
Using detailed accounting information for over 300 target firms, this paper analyzes whether bank-affiliated leveraged buyouts (LBOs) are different from independent LBOs, and whether it is advantageous for private equity firms to be part of a financial conglomerate. I find that the target firms of bank-affiliated LBOs are fundamentally different from those of independent LBOs in size, profits, profitability, liquidity, and risk. I also find that bank-affiliated LBOs do not have any positive effect on the target firms' operating efficiency. More importantly, the differences in target characteristics play an important role in the underperformance of bank-affiliated LBOs compared to independent buyouts. Further analyses show that the benign explanation for the underperformance based on lack of skill is unlikely. The overall results are consistent with the view that bank-affiliated LBOs are not advantageous due to distortions in selecting portfolio companies.
Number of Pages in PDF File: 41
Keywords: private equity, banks, leveraged buyout
JEL Classification: G21, G23, G24,working papers series
Date posted: December 16, 2012
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