Sources of value creation in private equity buyouts of private firms

51 Pages Posted: 1 Sep 2013 Last revised: 18 Jan 2022

See all articles by Jonathan B. Cohn

Jonathan B. Cohn

University of Texas at Austin

Edith S. Hotchkiss

Boston College - Carroll School of Management

Erin Towery

University of Georgia

Date Written: January 3, 2022

Abstract

Despite the prevalence of private equity (PE) buyouts of private firms, little is known about how these transactions create value. We provide evidence that PE acquirers disproportionately target private firms with weak operating profitability and those that have growth potential but are highly levered and dependent on external financing. Target firms grow rapidly post-buyout, especially those undertaking add-on acquisitions, and profitability increases for both profitable and unprofitable targets. Our evidence suggests that PE acquirers create value by relaxing financing constraints for firms with strong investment opportunities and improving the performance of weak firms, while financial engineering plays a limited role.

Keywords: Private Equity Buyouts, Private Firms, Financing Constraints, Capital Structure

JEL Classification: G34, G32, H25

Suggested Citation

Cohn, Jonathan B. and Hotchkiss, Edith S. and Towery, Erin, Sources of value creation in private equity buyouts of private firms (January 3, 2022). Available at SSRN: https://ssrn.com/abstract=2318916 or http://dx.doi.org/10.2139/ssrn.2318916

Jonathan B. Cohn (Contact Author)

University of Texas at Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-6827 (Phone)

Edith S. Hotchkiss

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Erin Towery

University of Georgia ( email )

Terry College of Business
Athens, GA 30602-6254
United States

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