The Cross-Border Buyout Next Door

Abstract

Using a hand-collected sample of global office locations of private equity (PE) firms, we show that portfolio companies backed by local offices outperform cross-border buyouts in terms of operational improvements. The effect strengthens with higher cross-country cultural distance or information frictions, and with the host country’s economic policy uncertainty. Experiential learning helps cross-border buyouts catch up in the long run, whereas hiring a local professional does not serve to close the performance gap with local offices. Furthermore, local offices can even provide a competitive edge over domestic peers. However, the extent to which this is true depends on society’s level of distrust in foreigners. Our main conclusions hold for measures of buyout pricing and deal returns and are robust to several endogeneity checks. Semi-structured interviews with PE professionals support our findings and shed light on antecedents of office openings and channels for portfolio companies’ outperformance.

Keywords: Cross-border, private equity, leveraged buyout, local office, operating performance

JEL Classification: G15, G23, G24; G34