Abstract: We investigate how the competition for buyout targets between private equity funds drives the relationship between deal leverage and performance. For targets acquired through investment bank auctions, a higher level of debt measured with respect to fundamentals (Debt / EBITDA) is associated with a higher purchase price and lower returns. This is consistent with the view that improving credit market conditions decrease the relative advantages between private equity fund managers and, thus, the sellers of the target firm ultimately benefit from easy credit. Our results are distinct from changes in deal prices driven by private equity fundraising and the results are robust to alternative proxies for the competitiveness of deals. Finally, we show that the choice to pursue auction deals in particularly loose credit markets, when expected returns are low, is positively related to proxies for agency conflicts between fund managers and fund investors.
The conference took place at the Saïd Business School of the University of Oxford in England on September 12-13, 2015.