Private Equity Debt Investors

Abstract

We provide an economic rationale for the expansion of private equity (PE) groups into the business of private debt investing. We argue and show empirically that combining PE with private debt provides dual benefits for the parent entity. On the one hand, in the primary loan market, the parent uses its debt management division as a source of cheap funding for the PE funds’ portfolio companies which boosts the funds’ equity returns. On the other hand, there is information spillover from the PE to the debt division, enabling the debt manager to profitably trade on this information in the secondary loan market. Our results suggest that PE firms with affiliated debt management arms benefit from competitive advantages relative to their single-market peers.