Who Benefits from the Leverage in LBOs?

43 Pages Posted: 6 Mar 2011 Last revised: 7 Mar 2011

See all articles by Tim Jenkinson

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Rüdiger Stucke

Warburg Pincus; University of Oxford

Date Written: February 28, 2011


Tax savings associated with increased levels of debt are often thought to be an important source of returns for private equity funds conducting leveraged buyouts (LBOs). However, as leverage is available to all bidders, the vendors may appropriate any benefits in the form of the takeover premium. For the 100 largest U.S. public-to-private LBOs since 2003, we estimate the size of the additional tax benefits available to private equity purchasers. We find a strong cross-sectional relationship between tax savings and the size of takeover premia; and on average the latter are around twice the size of the former. Consequently, the tax savings from increasing financial leverage essentially accrue to the previous shareholders rather than the private equity fund that conducts the LBO. It is, therefore, unlikely that (ex ante predictable) tax savings are an important source of returns for private equity funds. Furthermore, policy proposals that aim to restrict leverage or the tax-deductibility of debt are likely to have their impact mainly on existing owners of companies.

Keywords: Leveraged Buyouts, Taxes, Private Equity, Takeover Premium

JEL Classification: G34, H2

Suggested Citation

Jenkinson, Tim and Stucke, Rüdiger, Who Benefits from the Leverage in LBOs? (February 28, 2011). Available at SSRN: https://ssrn.com/abstract=1777266 or http://dx.doi.org/10.2139/ssrn.1777266

Tim Jenkinson (Contact Author)

University of Oxford - Said Business School ( email )

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HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI)

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Rüdiger Stucke

Warburg Pincus ( email )

450 Lexington Ave
New York, NY 10017
United States

University of Oxford ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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