Bank Affiliation in Private Equity Firms: Distortions in Investment Selection
California State University, Fullerton
August 31, 2014
This paper studies the effects of leveraged buyouts (LBOs) sponsored by bank-affiliated private equity firms, which account for up to 30% of annual LBOs. Using detailed accounting information for U.K. firms, I find that the targets of bank-affiliated LBOs and independent LBOs differ systematically in size, profits, profitability, and liquidity. There is also some evidence that targets of bank-affiliated LBOs have lower risk. The differences in target characteristics further play a role in the underperformance of bank-affiliated LBOs compared to independent buyouts. I find no support for the alternative explanation for the underperformance based on lack of fund managers' skill. The overall results are consistent with the view that being part of a financial conglomerate does not create advantages for the private equity firm or the target company due to distortions in the process of selecting portfolio companies.
Number of Pages in PDF File: 47
Keywords: private equity, banks, leveraged buyout
JEL Classification: G21, G23, G24,working papers series
Date posted: December 16, 2012 ; Last revised: September 14, 2014
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