Abstract

Using a comprehensive and proprietary data set on international private equity activity, this paper studies the determinants of buyout investments across 61 countries and 19 industries over 1990-2017. The study finds evidence that macroeconomic conditions, development of stock and credit markets, and the regulatory environment in a country are important drivers of international buyout capital flows. The paper shows that countries with low unemployment, more active stock and credit markets, and better rule of law receive more buyout capital. A difference-in-differences approach is used to explore the regulatory reforms some countries have adopted over the sample period. The findings are that countries receive significantly more buyout capital following investor protection and contract enforcement reforms. The impact of regulatory reform is more pronounced in countries with better corporate governance standards and education. Buyout investment responds to these factors more so than foreign direct investment and gross domestic fixed investment.

Highlights

  • Global private equity (PE) investments have increased tremendously over the last two decades

  • Using nearly comprehensive country-industry-level data on international private equity activity, we study the determinants of buyout investments across 61 countries over the period 1990 – 2017.5 Our results indicate that macroeconomic conditions, financial development, and regulatory environment all play some role in determining the level of buyout activity at the country level

  • Our results suggest that investor protection and contract enforcement reforms are crucial in private equity companies’ decision to invest in a specific country and the effect they have on how much buyout capital is invested is more pronounced in countries with better governance and education systems

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Summary

Introduction

Global private equity (PE) investments have increased tremendously over the last two decades. This paper attempts to explain these changes in global capital markets by exploring three main hypotheses that may explain trends in global PE investment: i) country and industry macroeconomic conditions, ii) financial market development, and iii) institutional and regulatory environment. Using nearly comprehensive country-industry-level data on international private equity activity, we study the determinants of buyout investments across 61 countries over the period 1990 – 2017.5 Our results indicate that macroeconomic conditions, financial development, and regulatory environment all play some role in determining the level of buyout activity at the country level. Our results are helpful in understanding how capital markets are going to evolve globally and if and which other countries are most likely going to trend like the United States and the United Kingdom in terms of financial development, which potentially has new implications for economic growth in other developed or developing nations.

Motivation and Hypotheses
Data and Descriptive Statistics
Main Results
Robustness Checks and Other Analysis
Conclusion
Full Text
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