The Determinants of Buyout Returns: Does Transaction Strategy Matter?

50 Pages Posted: 21 Nov 2010 Last revised: 14 Jun 2013

Brian Ayash

California State Polytechnic University, San Luis Obispo - Finance Area

Robert P. Bartlett III

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Annette B. Poulsen

University of Georgia - Department of Banking and Finance

Date Written: November 20, 2010

Abstract

This paper reexamines one of the most studied questions in the scholarship of leveraged buyouts (LBOs): how do LBO sponsors create value for their investors in take-private acquisitions? In so doing, the paper makes two significant contributions to our understanding of LBOs. Most importantly, the paper provides the first-ever analysis of the equity returns to LBO sponsors. Due to data limitations, prior studies have traditionally relied on total returns to an LBO (that is, returns to both debt and equity investors) to analyze the source of LBO value creation. Drawing on a unique database of LBO transactions, this paper examines instead the actual internal rates of return (IRRs) realized by LBO sponsors on a deal-by-deal basis, thereby permitting a direct analysis of how LBO sponsors create value for their investors in leveraged buyouts. Second, the paper demonstrates how the traditional approach to examining the determinants of LBO returns overlooks a number of important LBO transaction strategies that are used to enhance a sponsor’s equity returns. In particular, the paper demonstrates that a significant component of LBO sponsor returns stems not from operating performance changes but from timing tactics that LBO sponsors use to accelerate the liquidation of their investments and thereby increase their IRRs. Among other things, this latter finding helps explain the gradual bias of private equity firms away from IPOs as an exit strategy for their portfolio investments and towards cash acquisitions.

Keywords: LBOs, Private Equity, Return to Investment, Ownership Structure

JEL Classification: G24, G32, G34

Suggested Citation

Ayash, Brian and Bartlett, Robert P. and Poulsen, Annette B., The Determinants of Buyout Returns: Does Transaction Strategy Matter? (November 20, 2010). UC Berkeley Public Law Research Paper No. 1712393. Available at SSRN: https://ssrn.com/abstract=1712393 or http://dx.doi.org/10.2139/ssrn.1712393

Brian Ayash

California State Polytechnic University, San Luis Obispo - Finance Area ( email )

College of Business
San Luis Obispo, CA 93407
United States

Robert P. Bartlett III (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States
510-642-6646 (Phone)

University of California, Berkeley - Berkeley Center for Law, Business and the Economy

UC Berkeley School of Law
Berkeley, CA 94720

Annette B. Poulsen

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-3645 (Phone)

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