The Private Equity Myth

Abstract

The first wave of highly leveraged transactions (HLTs) also known as leveraged buyouts (LBOs) began in the late 1980s. Fewer transactions occurred in the 1990’s after a number of companies in the first wave failed when the economy slowed down. More recently, the driving force behind levered deals has been the private equity business. Private equity has grown exponentially in the past decade, see Kaplan and Schoar (2005). Nationally, an unprecedented takeover binge occurred between 2005-2007 as private equity firms used leveraged loans (at the same time that subprime borrowers used No Income No Assets loans to buy houses) to finance numerous transactions. This paper analyzes the purported impact of WACC on value and discusses how the Modigliani/Miller I proposition may have greater long term importance for private equity players.

Keywords: private equity, bankruptcy, WACC, value, Modigliani and Miller

JEL Classification: G10, G12, G31, G33