The Opportunity Cost of Capital of US Buyouts

41 Pages Posted: 18 May 2009 Last revised: 28 Jul 2009

See all articles by Alexander Peter Groh

Alexander Peter Groh

EMLYON Business School

Oliver Gottschalg

HEC Paris - Strategy & Business Policy

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 2009


This paper addresses the problem of accurately determining buyout opportunity cost of capital for performance analyses. It draws on a unique and proprietary set of data on 133 United States buyouts between 1984 and 2004. For each buyout, we determine a public market equivalent that matches the buyout in timing and systematic risk. We show that under realistic mimicking conditions, the average opportunity cost of capital is below the commonly used benchmark S&P 500. The surprising result has a simple explanation: ex post, many of the transactions mimicking the buyouts would have defaulted in the public market. Only under relaxed assumptions, is the average opportunity cost of capital close to the average index return. Our sensitivity analyses highlight the need for a comprehensive risk adjustment that considers both operating risk and leverage risk for an accurate assessment of buyout performance. This finding is particularly important as existing literature on this topic tends to rely on benchmarks without a proper risk adjustment.

Keywords: Private Equity, Risk-Adjusted Performance, Buyout, Benchmarking Alternative Assets

JEL Classification: G11, G24, G32

Suggested Citation

Groh, Alexander Peter and Gottschalg, Oliver, The Opportunity Cost of Capital of US Buyouts (February 1, 2009). IESE Business School Working Paper No. 780, Available at SSRN: or

Alexander Peter Groh (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132

Oliver Gottschalg

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351

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