Bank Affiliation in Private Equity Firms: Distortions in Investment Selection
California State University, Fullerton
August 5, 2016
Private equity ﬁrms that are affiliated with banks have become major players in the leveraged buyout (LBO) market, raising billions of dollars in funds. In this paper, I investigate value creation of these LBOs through operating performance, leverage, and pricing. I ﬁnd that bank-affiliated LBOs fail to create operating performance gains, on average. Moreover, I ﬁnd that targets of bank-affiliated and independent LBOs are systematically different. While I ﬁnd no difference in operating performance gains between bank-affiliated and independent LBOs with matched target characteristics, all ﬁrms that share the target characteristics of bank-affiliated LBOs show worse post-buyout operating performance. Combined with no difference in leverage and deal pricing, the overall results suggest that bank affiliation negatively affects the economic benefit of LBOs due to differing objectives that result in distortions in investment selection.
Number of Pages in PDF File: 47
Keywords: private equity, banks, leveraged buyout
JEL Classification: G23, G24, G34
Date posted: December 16, 2012 ; Last revised: August 11, 2016