Does the Reputation of a Private Equity Group Break the Bank-Dependence of its Portfolio Company?

Posted: 12 Jan 2012 Last revised: 7 Jun 2013

See all articles by Glebs Ivanovs

Glebs Ivanovs

Goethe University Frankfurt - House of Finance

Daniel Schmidt

University of Frankfurt, CEPRES Center of Private Equity Research

Date Written: December 30, 2011

Abstract

We investigate the impact of the reputation of a private equity group (PEG) on financing costs in leveraged buyouts (LBOs). PEGs with a strong reputation have superior selection abilities and may be able to obtain cheaper LBO loans due to their role in limiting moral hazard or their impact on lenders’ bargaining power in loan contract negotiations. We examine a sample of 4,111 credit facilities within 1,524 PEG-sponsored LBO loans in North America and Europe between 1993 and 2009. After controlling for other borrowers’ characteristics, the financing contract, and other factors, we find that PEGs’ reputation indeed lowers financing costs. The size of the effect depends crucially on the chosen syndicate structure. The effect on credit spreads is much stronger when the loan syndicate is highly concentrated. The literature reveals that concentrated syndicate structures are chosen by less transparent and more bank-dependent borrowers. We therefore conclude that well-reputed PEGs reduce financing costs because they are able to alleviate the effects of information monopolies that arise when asymmetric information limits the degree of competition between financing banks.

Keywords: Private Equity, Buyouts, Portfolio Company, LBO Debt, Credit Terms, Reputation, Banks

JEL Classification: G21, G23, G24, G32

Suggested Citation

Ivanovs, Glebs and Schmidt, Daniel, Does the Reputation of a Private Equity Group Break the Bank-Dependence of its Portfolio Company? (December 30, 2011). Available at SSRN: https://ssrn.com/abstract=1983255 or http://dx.doi.org/10.2139/ssrn.1983255

Glebs Ivanovs (Contact Author)

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, DE 60323
Germany

Daniel Schmidt

University of Frankfurt, CEPRES Center of Private Equity Research ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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