Economics of Leveraged Buyouts: Theory and Evidence from the UK Private Equity Industry

82 Pages Posted: 19 Mar 2020

See all articles by Alex Belyakov

Alex Belyakov

University of Pennsylvania, The Wharton School

Date Written: March 19, 2020

Abstract

Empirical analysis of a sample of companies with private equity (PE) ownership in the UK shows that PE firms act as deep-pocket investors for their portfolio companies, rescuing them if they fall in financial distress. In contrast, external financing is expensive for companies without PE-ownership in financial distress. The paper builds a model that shows how companies form rational expectations about the costs of financial distress, and how these expectations affect ex-ante policies. The model explains the empirically-observed differences in how companies with and without PE-ownership invest, pay dividends, and issue debt. In particular, the model quantitatively explains the difference in leverage of companies with and without PE-ownership. The model shows that greater tax-shield benefits and superior growth of PE-backed companies can explain 6.4% of the abnormal return of PE firms. The conclusion that follows from the paper, however, is that abnormal returns PE firms cannot be replicated by other investors.

Suggested Citation

Belyakov, Alex, Economics of Leveraged Buyouts: Theory and Evidence from the UK Private Equity Industry (March 19, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3689953 or http://dx.doi.org/10.2139/ssrn.3689953

Alex Belyakov (Contact Author)

University of Pennsylvania, The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104
United States

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