Resilience and Cyclicality in Private Equity: Value Creation and Investment Flows in Economic Cycles

Abstract

This study investigates the effects of economic cycles on abnormal value creation of buyouts (BO) and on the investment activity of the corresponding Private Equity (PE) funds. We benchmark a large sample of BO transactions with closely matched public companies from 1986 to 2017. Our results show that BO transactions have created significantly more value overall, but abnormal value creation has disappeared in more recent periods. However, BO transactions are considerably less sensitive to adverse shocks in the real economy than their public counterparts. The adverse impact of a 1% increased exposure to economic distress is between 0.4% and 0.5% lower for BO than for public benchmarks. Using the quarterly cash-flow data of the corresponding PE funds, we find that investment activity of initial fund flows is slightly pro-cyclical, while reinvestment activity is highly countercyclical to the real economy. Our results imply that PE funds act as liquidity providers during economic distress by providing 45% to 49% more capital to their existing portfolio companies than in undistressed periods.

Keywords: Private Equity, Leveraged Buyouts, Institutional Investors, Value Creation, Economic Cycles

JEL Classification: G10, G11, G15, G23, G30, G32