The Role of Private Equity in Corporate Asset Sales: Theory and Evidence

Abstract

We model the decision by private equity to bid for corporate assets, and analyze interactions between the bidding of private equity and strategic buyers. The model predicts that seller gains depend on the type of buyer, contingent on whether private equity enhances value through restructuring skill or an ability to identify undervalued assets. Empirical tests show private equity deals generate greater seller returns that are related to type of exit and the subsequent increase in the asset's enterprise value, which exceeds that of benchmark firms. The evidence supports the view that private equity has valuable restructuring skills.