Measuring Idiosyncratic Risks in Leveraged Buyout Transactions
29 Pages Posted: 3 Mar 2008 Last revised: 30 Dec 2013
Date Written: March 1, 2008
We use a contingent claims analysis model to calculate the idiosyncratic risks in Leveraged Buyout transactions. A decisive feature of the model is the consideration of amortization. From the model, asset value volatility and equity value volatility can be derived via a numerical procedure. For a sample of 40 Leveraged Buyout transactions we determine the necessary model parameters and calculate the implied idiosyncratic risks. We verify the expected model sensitivities by varying the input parameters. For the first time, we are able to calculate Sharpe Ratios for individual Leveraged Buyouts, thereby fully incorporating the leverage risks.
Keywords: Idiosyncratic Risk, LBO, Private Equity, Benchmarking, CCA
JEL Classification: G13, G24, G32
Suggested Citation: Suggested Citation