Abstract
Using a novel hand-collected dataset on leveraged buyouts, this study tests non-mutually exclusive hypotheses for club formation: collusion; financial resource pooling, either due to the riskiness of the target firm or to the fund’s investment limits; and experience. Results of the empirical analysis support the resource pooling motivation: club deals allow their members to buy larger targets and to reduce their equity commitment compared to solo deals. As the amount of equity they should commit to a deal increases, private equity buyers’ preference for club deals becomes stronger. Evidence also demonstrates that club deals do not harm competition, in that they are associated with a higher level of competition occurring in the private phase of deal negotiations. Targets’ stock price reactions around the acquisition announcements and takeover premiums are similar in solo deals and club deals. Finally, club deals are more likely created when private equity funds are less experienced.
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