DP8914 Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

Author(s): Ulf Axelson, Tim Jenkinson, Per Johan Strömberg, Michael Weisbach
Publication Date: March 2012
Keyword(s): capital structure, credit cycles, leveraged buyouts, Private equity
JEL(s): G24, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8914

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.