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Private Equity: Boom and Bust?

10 Pages Posted: 16 Jan 2008 Last revised: 24 Jan 2008

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Julian R. Franks

London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

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Abstract

This article reviews the recent trends (2001-2006) in private equity and leveraged buyouts (LBOs), focusing on changes in valuations, amount of leverage, and the institutional nature of leveraged financing. It compares these recent trends to the private equity boom and bust cycle of the 1980s, suggesting that there might have been a boom in recent times as well, and examines the likely consequences of a bust. It presents a case that the dispersed and opaque nature of recent LBO debt could transform few, large LBO defaults into a systemic event, akin to the sub-prime crisis. It concludes with policy recommendations concerning the disclosure of institutional ownership of LBO debt and the ability of bankruptcy codes to deal with large LBO defaults.

Keywords: leveraged buyouts, hedge funds, securitization, credit risk transfer, financial crisis, bankruptcy

JEL Classification: G20, G30

Suggested Citation

Acharya, Viral V. and Franks, Julian R. and Servaes, Henri, Private Equity: Boom and Bust?. Journal of Applied Corporate Finance, Vol. 19, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=1083142

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Julian R. Franks

London Business School ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 x3449 (Phone)
+44 20 7724 3317 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Henri Servaes

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7000 8268 (Phone)
+44 20 7000 8201 (Fax)

HOME PAGE: http://faculty.london.edu/hservaes/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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