Value Creation and Pricing in Buyouts: Empirical Evidence from Europe and North America

Posted: 18 Jan 2011 Last revised: 20 Dec 2011

See all articles by Ann‐Kristin Achleitner

Ann‐Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies

Reiner Braun

Technische Universität München (TUM) - TUM School of Management; Center for Entrepreneurial and Financial Studies

Nico Engel

Technische Universität München - Center for Entrepreneurial and Financial Studies

Date Written: July 28, 2011

Abstract

Using a unique proprietary data set of 1,980 realized and unrealized buyouts completed between 1986 and 2010, we examine entry and exit pricing in buyouts and its influence on private equity (PE) sponsors’ returns. We find that besides leverage and operational improvements, EBITDA multiple expansion (i.e. the difference between entry and exit pricing) is a fundamental factor in explaining equity returns and the result of skill rather than pure luck. We also provide evidence that more experienced PE sponsors use more debt to finance a PE transaction and debt is positively related to entry buyout pricing. However, for a transaction with a given leverage level, more experienced PE sponsors are able to negotiate lower prices. In addition, our results show that deals conducted by first time funds which are realized in a later stage of a fund’s life cycle are associated with lower exit prices which can be explained by the increased exit pressure for the PE sponsor.

Keywords: Private Equity, Buyouts, Value Creation, Leverage, Pricing, Multiple Expansion

JEL Classification: G24, G30, G34

Suggested Citation

Achleitner, Ann-Kristin and Braun, Reiner and Engel, Nico, Value Creation and Pricing in Buyouts: Empirical Evidence from Europe and North America (July 28, 2011). Review of Financial Economics, Vol. 20, No. 4, pp. 146-161, Available at SSRN: https://ssrn.com/abstract=1742383

Ann-Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25181 (Phone)

Reiner Braun

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, Deutschland 80333
Germany
+498928925181 (Phone)
+498928925188 (Fax)

HOME PAGE: http://www.ef.wi.tum.de/

Center for Entrepreneurial and Financial Studies ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Nico Engel (Contact Author)

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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