Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

Ulf Axelson, Tim Jenkinson, Per Strömberg, Michael Weisbach

Series number :

Serial Number:

329/2012

Date posted :

March 01 2012

Last revised :

March 20 2012

SSRN

Keywords

private equity •
capital structure •
buyouts •
credit cycles

Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories.

Using a large, detailed, international sample of buyouts from 1980-2008, we find that buyout leverage is unrelated to the cross-sectional factors – suggested by traditional capital structure theories – that drive public firm leverage. Instead, variation in economy-wide credit conditions is the main determinant of leverage in buyouts, while having little impact on public firms. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.

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