Buyout Market Research Articles

Mergers and acquisitions with private equity intermediation

We develop a search model of mergers and acquisitions (M&A), intermediated by private equity (PE) funds which may face pressure to sell. The selling pressure leads to the development of a secondary buyout (SBO) market, enabling PE funds to bail each other out. Interestingly, an increase in the number of PE funds can improve each fund’s value, because the enhanced benefits of SBOs can prevail over the reduction in value from narrower buy-sell spreads due to more intense competition. We calibrate the model using data for the US middle market and find that PE funds could lose 64% of their valuation without SBOs. Moreover, the increase in the number of funds from 2000 to 2017 contributes to a 48% increase in fund valuation due to the complementarity among funds. Nevertheless, our model predicts that this mechanism might have peaked in 2021, and more PE funds could decrease their value.

Lending when relationships are scarce: The role of information spread via bank networks

We investigate how information flows within bank networks facilitate syndicate formation and lending in the leveraged buyout (LBO) market, where relationships between banks and borrowers are scarce and borrower opacity is high. Using novel measures that characterize a bank's ability to source and disseminate information within its loan syndication network, we show that the extent of this capability influences which banks join the syndicate, the share the lead bank holds, and LBO borrowing terms. Banks' ability to source and disseminate network-based information is particularly useful when ties to prospective borrowers are lacking, with the information flows extending beyond knowledge on PE firms and LBO targets.

Lending When Relationships Are Scarce: The Role of Information Spread via Bank Networks

We investigate how bank networks facilitate syndicate formation and lending in the leveraged buyout (LBO) market, where ties between banks and borrowers are scarce and borrower opacity is high. Using novel centrality measures that capture how information might flow through the network, we show that networks disseminate borrower-relevant information that influences which banks join the syndicate, the share the lead bank holds, and LBO lending terms. Further, banks’ knowledge of their network is highly localized, unrelated to their reputation, and a useful information source when ties to the borrower are lacking. Our findings emphasize the importance of information diffusion via networks for resolving asymmetric information problems during loan syndication.

Leveraged buyout booms and busts: can Islamic finance help prevent and mitigate such market distortions?

The industry of private equity and leveraged buyout has been, since its beginnings, subject to several chapters of bubbles and busts, the majority of whom are initiated under similar circumstances (excess of liquidity, junk debt and mimetic behavior).The Islamic finance is a financial system that complies with the rules of the Sharia Law, and which naturally allows the achievements of purposes of Sharia, such as protection of property and capital, fair wealth distribution, reduction of uncertainty and speculation, to name a few.From this perspective, this paper discusses the capacity of Islamic finance to help prevent some factors that trigger financial crises in the leveraged buyout market and to accomplish the intended purposes through this asset class.In the first part of this paper, the authors try to break down some of these common factors that trigger or catalyze the economic booms of the leverage buyout industry, and propose a framework to visualize their effects through an agent-based Simulation program. The second part of the paper describes how Islamic economic principles constitute brakes to some distortions and excesses in the market, in such a way that the probability of occurrence of a boom decreases drastically. Finally, these Islamic features are added up to the simulation to provide a comprehensive benchmark.

An Analysis of Debt and Equity Market Reaction to Pension Risk Transfer Announcements: What Investors Need to Know

The pension annuity buyout market continues to experience very strong growth, with record deal volumes being reported. Cantor, Hood, and Power (2017) document a large variation in stock market reaction to annuity buyout announcements. The fundamental question remains however: Does the equity market care about these transactions? In Cantor, Hood, and Power (2018), we hope to further understand the market’s view of pension annuity buyout transactions. We argue that the funded status of the pension fund and the motivation for the buyout could drive the market’s reaction. By expanding our sample and gathering data on funded status, we can test the market’s reaction based on the funded status of the plan prior to the announcement. In addition, we examine the credit market’s reaction to the buyouts. We argue that the equity and debt markets may have a different reaction to the news, conditional on the funded status and credit quality of the company. Our research has important implications for plan sponsors considering whether a pension annuity buyout is an effective transaction. Moreover, our research is relevant for investors who are trying to interpret the impact of these transactions on a company’s value.

The History of Junk Bonds and Leveraged Buyouts

Abstract Leveraged buyouts (LBOs) and their effect on the economy (following their history that started in 1919 with the first LBO of Ford Motor Company) cannot be adequately discussed without taking into consideration the junk bonds. The reason for this necessary linkage is directly connected with the power that rests in the junk bonds, because they are used to finance LBO deals. The original-issue high-yield debt instrument, the so-called “junk bond” innovation, was pioneered by Michael Milken of Drexel Burnham, providing many hostile bidders and LBO firms with the enormous amounts of capital needed to finance multi-billion-dollar deals. The history of these two instruments goes hand in hand, as for example, the conjunction between the U.S. recession of the early 1990s along with the junk bond market crash following the fall of the investment bank Drexel Burnham Lambert, brought the first LBO wave (the one that started in 1980) to an end. This is not the only example that shows a true connection between LBOs and junk bonds. This paper aims to bring into light the liaison that exists between these two instruments and the history that was created by the financing of LBOs with junk bonds. The present article will bring into focus the speculations that rests on the idea that the junk bonds has proven to be a life saver to big leveraged buyout groups as companies are able to get access to funding as investors look to invest in companies with high yields. Apart from this subject, this paper will try to figure out the role that the junk bond market plays in new LBO's, especially the ones created after 2012 (there was a slowdown in the LBOs activity after the financial turnover from 2008, and only after 2012 we can observe an improvement in the leveraged buyout market). This research paper will try to stimulate thinking about the effects that are generated on a market by a LBO, the power that exists behind a leveraged buyout (e.g. the junk bonds) and the connection that makes them prevail and become powerful, mainly together.

Informed Intermediation of Longevity Exposures

ABSTRACTWe examine pension buyout transactions and longevity risk securitization in a common framework, emphasizing the role played by asymmetries in capital requirements and mortality forecasting technology. The results are used to develop a coherent model of intermediation of longevity exposures, between defined benefit pension plans and capital market investors, through insurers operating in the pension buyout market. We derive several predictions consistent with the recent empirical evidence on pension buyouts and offer insights on the role of buyout firms and regulation in the emerging market for longevity‐linked securities. A multiperiod version of the model is used to explore the effects of longevity risk securitization on the capacity of the pension buyout market.

Bank Affiliation in Private Equity: Distortions in Investment Selection

Private equity firms that are affiliated with banks have become major players in the leveraged buyout (LBO) market, raising billions of dollars in funds. In this paper, I investigate value creation of these LBOs through operating performance, leverage, and pricing. I find that bank-affiliated LBOs fail to create operating performance gains, on average. Moreover, I find that targets of bank-affiliated and independent LBOs are systematically different. While I find no difference in operating performance gains between bank-affiliated and independent LBOs with matched target characteristics, all firms that share the target characteristics of bank-affiliated LBOs show worse post-buyout operating performance. Combined with no difference in leverage and deal pricing, the overall results suggest that bank affiliation negatively affects the economic benefit of LBOs due to differing objectives that result in distortions in investment selection.

Informed Intermediation of Longevity Exposures

We examine pension buyout transactions and longevity risk securitization in a common framework, emphasizing the role played by asymmetries in capital requirements and mortality forecasting technology. The results are used to develop a coherent model of intermediation of longevity exposures, between defined benefit pension schemes and capital market investors, through insurers operating in the pension buyout market. We derive several predictions consistent with the recent empirical evidence on pension buyouts, and offer insights on the role of buyout firms and regulation in the emerging market for longevity-linked securities. A multi-period version of the model is used to explore the effects of longevity risk securitization on the capacity of the pension buyout market.

Leveraged Buyouts of Private Companies

Over the last two decades, the number (enterprise value) of leveraged buyout transactions involving privately held targets totals more than 10,000 (over $850 billion), accounting for 46% (21%) of the worldwide leveraged buyout market. Yet the vast majority of academic studies focus on the buyouts of publicly held targets. This paper investigates the effects of leveraged buyouts on privately held targets. I find that, unlike the corporate restructuring process of public firms after the buyouts, private targets sponsored by private equity firms grow substantially after the buyouts. The overall evidence suggests that private equity firms, through leveraged buyouts, facilitate private targets’ growth by alleviating targets’ investment constraints.

Pensions buy-out: Deal or no deal?

This paper considers the buy-out process from the perspective of trustees of UK occupational pension schemes. It considers the decisions faced by trustees and the legal factors that trustees need to consider before and during the buy-out process. Proceeding with a buy-out policy to secure all or part of the pension benefits is often a one-off decision for trustees so they must get it right. Practical tips are offered to assist with the smooth running of a buy-out transaction, which is often complex. The key lies in (1) good preparation and project management and (2) a good network of advisers to provide support and advice along the way. The global financial downturn and its impact on the UK pensions buy-out market cannot be ignored. The financial downturn has, to some degree, put the pensions buy-out market on hold in the United Kingdom. However, once the markets stabilise, we expect insurance-based pensions solutions in the United Kingdom to come back to the fore.

The Impact of Competition on the Selection and Valuation of Deals by Private Equity Firms

An important but largely neglected question in the literature on private equity investing is how the competitive environment shapes the behavior of private equity firms. In this study, we first explore whether competition has an impact on the role of previous industry knowledge for the generation of investment opportunities. Second, we study the impact of competition on the valuation of investment targets. Our hypotheses are tested on a unique hand-collected dataset of the UK buyout market. Using different measures of competition, our results show that increased competition has two opposing effects on the role of previous industry knowledge for the selection of investment opportunities. Further, increased competition leads to higher valuations of target firms.

Family Firm Buy-Outs, Private Equity and Strategic Change

Management buy-outs (MBO) and buy-ins (MBI) represent an important succession option in family firms. They thus also provide an important deal source for private equity firms. Yet, while much attention in the private equity and buy-out market has been upon large public to private transactions, the family buy-out part of the market is not well-understood. In light of these issues, the purpose of this article is twofold: We provide an overview of developments in the family firm buy-out market. Specifically, we examine trends in the number and value of deals, deal sizes, share of the total buy-out market, employment and the role of private equity. We use CMBOR’s unique database comprising the population of 30,000 European buy-outs as the source for this analysis. We undertake a detailed study of strategic changes in family firms as a result of a buy-out. Specifically, we examine whether changes in the strategy of former private family firms affected by the ownership and governance of the firm before the buy-out. These issues are examined using a novel hand-collected representative questionnaire survey of 104 private family firms across Europe which had a buy-out funded by private equity between 1994 and 2003.

Annuities & Accessibilility: How the Industry Can Empower Consumers to Make Rational Choices

This is the third of our series of reports that focus on pensions issues of direct relevance to insurance companies, financial advisers, employers, trustees, consumer bodies and policymakers. Pension annuities are complex financial instruments that are not well understood by the press or consumers. This report sets out to identify barriers to greater efficiency in the pension annuity market and to propose solutions. By 'pension annuity' we refer to immediate individual annuities bought with defined contribution (DC) pension funds at retirement. This excludes the voluntary annuities that consumers purchase with non-pension capital, and the bulk buy-out market, where employers offload defined benefit (DB) liabilities through the purchase of immediate and deferred annuities for scheme members.

The Annuity Bulk Buy-Out Market. A Discussion Meeting

INTRODUCTIONThis Sessional Meeting takes the form of a panel discussion, asking the question: “Managing defined benefit risk management: is buy-out the future?”The following are subjects for discussion:— What is driving the increased interest in buy-out and other risk transfer solutions?— Will it last?— Who are the players in this market? Is there room for everyone? Is there enough capital?— What impact will current economic conditions have on decisions which trustees make?— What is the role of the Regulator, and how is regulation evolving?— Are products evolving to meet market needs?— What are the implications for actuarial pension consultants of the growing buy-out market?

Quel rôle pour les organismes de capital-investissement sur le marché de la cession-reprise ?

What role do private equity firms play on the institutional buy-out market ? In this article, we show that private equity firms do not only provide external financing to buyers of firms but informational services too. They solve problems related to asymmetries of information the market of buy-out suffers from. We underline the specificity of private equity firms when they invest in buy-out. These financial institutions are not only the ones that are the most likely to reduce agency conflicts between external investors and acquirers, but they also limit the conflicts between potential acquirers and sellers. We also put into light the liquidity service and the confidentiality service private equity firms provide ever since they develop institutional buy-out. JEL Classification : G24, G34, G39

The dark side of LBOS. Private equity investors be forewarned!

The institutional environment regulating mergers and acquisitions (M&A) is crucial for the private equity industry, especially for leveraged buyout (LBO) transactions, which are currently at the center of an intensive debate in the US, as seen in many European countries over the last decade. One of the most controversial issues of an LBO deal is associated with its ultimate economic result, often perceived as an indirect and fraudulent example of financial assistance provided by the acquired firm for the purchase of its own shares, to the detriment of its assets and stakeholders. Given the potential damage to the target’s stakeholders, LBOs have been strongly debated and even prohibited in Italy. The institutional uncertainty surrounding the legitimacy of LBOs had a negative impact on the Italian private equity market. Recently, Italy issued an innovative corporate governance reform which offered a more favorable legal environment to this type of transactions and represented an important turning point for the domestic private equity market. The institutional change, induced by the above reform, provides scholars and policy makers with guidelines on how PE transactions may be spurred with an appropriate regulation aimed at legalizing LBOs, as well as protecting the interests of the target firm and its stakeholders. Notwithstanding the new reform, several issues remain unsolved and the admissibility of certain types of LBOs is still under debate. The purpose of this paper is two-fold: a) to shed some light on the debate on the legitimacy of LBOs by emphasizing, from an economic and financial point of view, the critical features of this class of transactions, and b) to highlight unsolved problems associated with the new LBO reform, particularly with reference to the investors’ liability. The Italian buyout market, whose transactions were previously prohibited and only recently legalized, offers a unique example in order to better understand the current international debate on the admissibility of LBOs and the related consequences for the target’s stakeholders.

Risk Aspects in Private Equity Investments

The motivation of this paper was to support a prospective Private Equity investor in his selection of LBO (leveraged buyout) funds and to give practical insights into the buyout market's recent transactions. More precisely, the hypothesis was that the combination of both high-level operating risks and financial leverage risks would be disadvantageous for investors. In general, buyout funds from the US with investment focus on the media industry and the consumer-related industry as well as EU buyout funds focusing on the industrial/energy industry and the consumer-related industry achieved strong excess returns from the mid-1980s to the early 2000s. These findings confirm this paper's hypothesis that the combination of both high-level operating risks and financial leverage risks - mainly present in funds investing in the high-technology sector - would be disadvantageous for investors. By regressing the vintage-specific funds' IRR on the corresponding S&P 500's CAGR (compound average growth rate) as of end-2006, one can note with statistical significance (at the 5 percent significance level) that most buyout fund segments are positively depending on the stock market's long-term returns. For buyout investors, a conservative approach may be to choose LBO funds and corresponding management companies which have (or aim to have) a major part of their portfolio companies within the consumer-related industry and which are at least partly geographically diversified. Concerning the buyout cases, low-valued target companies - measured by EBITDA multiples - with extensive cash available tend to be top-ranked regarding the potential IRR. Future - including those which are still pending - LBO transactions may create substantial shareholder value provided that these are carried out by adhering to reasonable market multiples and focusing on stable industries. Contrarily, the deals majorly completed for the reason of the attractive debt financing environment may potentially prove to be unsuccessful. Future LBOs of publicly-listed companies could increasingly take place in the energy industry and the refining industry which - positively affected from low EBITDA multiples and strong free cash flows making early debt redemptions possible - both reveal the highest potential IRRs on median average with 27 percent and 21.3 percent, respectively.

Private Equity: Boom and Bust?

The private equity or leveraged buyout (LBO) market in Europe and the U.S. has grown enormously over the last two decades, from $7.5 billion in 1991 to $500 billion in 2006. Much of the financing of recent transactions has come in the form of syndicated debt, which is dispersed after origination to many non‐bank financial institutions. This financing practice has two important possible consequences:First, bankers' incentives to engage in effective ex‐ante screening and ex‐post monitoring of deals have been weakened, which may have led to excessive lending while encouraging buyers to overpay. Consistent with this possibility, the authors provide new evidence that some recent transactions have occurred at very low EBITDA‐to‐capital ratios, financed with high levels of debt that recall those of the late 1980s and early 1990s.Second, there is a scarcity of information about the identity of the ultimate holders of the LBO debt; and as a consequence of the resulting uncertainty, a few defaults of major LBO deals could cause a drying up of new funding for financial institutions. The end result could be that the veil covering the repackaging of LBO debt converts a small shock to the LBO sector into a liquidity crisis for its financiers. Such liquidity problems could in turn affect not the financing and re‐financing of just LBO deals, but other as set classes as well, including lending by banks to public firms. The authors offer a number of suggestions for increasing the transparency of this market.

Big is Better: Growth and Market Structure in Global Buyouts

he word that best describes the recent trends in the private equity industry is “big.” The assets under management (AUM) for the entire industry have grown exponentially, deal sizes are getting larger, and the largest fi nancial sponsors are becoming even bigger on a relative basis, leading to a more concentrated industry. With no signs of these developments abating, we explore their potential ramifi cations in this article. In particular, we ask: How is competition within the industry likely to change? What does greater concentration mean for investors in private equity funds? And what is the probable impact, if any, on the ownership and acquisition premiums of buyout targets? To put these developments in perspective, consider that, at the end of 2006, the industry AUM were estimated to total more than $1.3 trillion. Compared with 1980, this implies a compound annual growth rate of 24%—substantially faster than the 11% at which the stock of public equity securities, private and public debt securities, and bank assets rose during this period. Between 2003 and 2006, commitments to private equity funds surged 260% to more than $400 billion. By far the largest share has gone into buyout funds whose investment pace has accelerated substantially. With the real cost of debt near historically low levels, and far below the earnings yield on equities, the global volume of leveraged buyouts (LBOs) skyrocketed to more than $700 billion in 2006, a fourfold increase compared with 2003. However, this record is unlikely to last for long: In the fi rst six months of 2007, buyout deals already totaled around $560 billion, or 25% of global mergers and acquisitions. Individual buyouts have become substantially larger, involving publicly-listed fi rms with greater frequency. In a signifi cant number of cases, the size of target companies have required sponsors to work together in so-called “club deals,” although more recently buyout fi rms seem to have preferred to include limited partners and even existing shareholders instead. Increasingly, general partners (GPs) look for global investment opportunities, while limited partners (LPs) seek to diversify their portfolios by committing capital to funds investing in different geographies. And while some buyout fi rms have recently fl oated special investment vehicles on the public stock markets in an effort to get access to “permanent capital,” others have decided to sell minority stakes through an initial public offering (IPO)—a step that was once viewed as heresy by the private equity industry. All of these developments are contributing to the profound changes taking place in the structure of the private equity industry. In analyzing how concentration in the industry has evolved over time, we start by examining the growth of individual funds and the drivers behind the observed growth differentials. Next, we evaluate the degree of concentration in fundraising and compare our fi ndings with the market concentration in other fi nancial industries. On the product side, we look at the impact of club deals and the extent of market contestability in an increasingly global buyout market. Finally, we discuss possible future growth strategies for buyout fi rms.