Bank Affiliation in Private Equity Firms: Distortions in Investment Selection
California State University, Fullerton
February 19, 2016
Private equity firms that are affiliated with banks have become major players in the leveraged buyout (LBO) market, raising billions of dollars in funds. Criticisms of bank-affiliated LBOs in the literature raise the question of whether they create less value compared to independent LBOs. In this paper, I show that bank-affiliated LBOs not only create less value than independent LBOs, they actually create no value at all. I also show that the differences in value creation can be attributed to target selection. I do this by examining cross-sectional variation of target firms' post-buyout operating performance, using detailed accounting information of U.K. firms. I find that targets of bank-affiliated and independent LBOs are systematically different, and that targets of bank-affiliated LBOs have similar post-buyout operating performance compared to their matched independent LBOs, whereas all firms that share the characteristics of bank-affiliated LBO targets show worse buyout-induced operating performance. The overall results are consistent with the view that bank affiliation gives rise to differing objectives that result in selecting investments that are not ideal for value creation.
Number of Pages in PDF File: 51
Keywords: private equity, banks, leveraged buyout
JEL Classification: G23, G24, G34
Date posted: December 16, 2012 ; Last revised: February 21, 2016
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