83 Pages Posted: 12 Mar 2005 Last revised: 28 Oct 2008
Private equity funds are important actors in the economy, yet there is little analysis explaining their financial structure. In our model the financial structure minimizes agency conflicts between fund managers and investors. Relative to financing each deal separately, raising a fund where the manager receives a fraction of aggregate excess returns reduces incentives to make bad investments. Efficiency is further improved by requiring funds to also use deal-by-deal debt financing, which becomes unavailable in states where internal discipline fails. Private equity investment becomes highly sensitive to economy-wide availability of credit and investments in bad states outperform investments in good states.
Keywords: LBO funds, Capital Structure, Private Equity, Ex Ante Financing, Ex Post Financing, Incentives in Private Equity
JEL Classification: G32, G23
Suggested Citation: Suggested Citation
Axelson, Ulf and Strömberg, Per and Weisbach, Michael S., Why are Buyouts Levered? The Financial Structure of Private Equity Funds. Charles A. Dice Center Working Paper No. 2008-15; Fisher College of Business Working Paper No. 2008-03-014; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=676546