The Motives for Private Equity Buyouts of Private Firms: Evidence from U.S. Corporate Tax Returns

Abstract

This paper uses corporate tax return data to study the motives for private equity (PE) buyouts of U.S. private firms between 1995 and 2009. In contrast with prior evidence that PE acquirers target public firms facing overinvestment problems, we find that PE acquirers target private firms facing underinvestment problems due to financing constraints. These firms tend to grow substantially post-buyout. We also find some evidence that PE buyers target industry laggards as well, and engineer operational turnarounds in these firms.

Keywords: Private Equity Buyouts, Capital Structure, Private Firms

JEL Classification: G34, G32, H25