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 private equity (PE) buyouts of private U.S. firms. PE firms disproportionately target two types of private companies – those with poor operating performance and those that have growth potential but are dependent on external financing and already highly levered. In contrast to studies of buyouts of public firms in the same time period, we find significant improvements in operating performance and rapid growth post-buyout. Overall, our evidence suggests two key rationales for PE buyouts of private firms in the U.S. - to engineer operational turnarounds and to alleviate underinvestment.

Keywords: Private Equity Buyouts, Private Firms, Financing Constraints, Capital Structure

JEL Classification: G34, G32, H25