Expertise or Proximity in International Private Equity? Evidence from a Natural Experiment

Abstract

Using data on international leveraged buyout (LBO) investments, we analyze whether lack of proximity impedes the ability of U.S. private equity (PE) investors to successfully invest across borders. In particular, U.S. PE investors have substantial experience in monitoring and supporting portfolio firms, but have to trade off this advantage with the difficulty of monitoring cross-border LBO investments that are further away. We exploit the exogenous shock to “effective” proximity of U.S. PE investors to other countries due to open sky agreements (OSA) signed between the U.S. and the countries of potential LBO target firms. We find that increase in proximity due to the ease of travel afforded by an OSA between the U.S. and another country has a positive and statistically significant impact on U.S. PE firms’ propensity to invest in LBOs in that country. Further, improvements in ease of travel between the target firm country and the U.S. are followed by more successful LBO investments in those countries, and this effect is driven by investments made by U.S. PE investors. In addition, for the set of LBOs for which OSAs occur after the deal, LBOs backed by U.S. PE firms perform better when an OSA happens immediately subsequent to the deal rather than later. Moreover, our results do not reflect access to U.S. product or public financial markets, since we do not find any evidence that OSAs have an impact on success rates of investments by non-U.S. PE firms. Our results are broadly consistent with the idea that proximity is an important factor in PE investors’ decision to invest across borders. Further, proximity impacts the success of cross-border LBOs at least partly due to the effect of active monitoring by PE investors.