Risk and perils in LBO transactions

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

In this study, the risks and perils arising from LBO transactions are considered. By focusing attention on 2,450 deals, for which we compare the performance achieved before and after the deal, our study adds to previous literature that has investigated the post-LBO operating performance and the factors which can determine the success of those deals. In particular, we confirm the hypothesis of the peril of assets stripping, even if we find evidence that the presence of private equity, among other factors, can help to mitigate that issue. We find evidence that, especially in the short term, enterprises suffer from a slight deterioration in operating performance compared to their situation before the buyout. Moreover, under specific circumstances, enterprises experience a slight improvement in the ability to generate cash. Finally, we find positive evidence about the presence of private equity investors, which through their governance are mainly able to promote the growth of firms, as well as to increase the capability to generate cash, together with the hypothesis to generate positive effects on the level of employment. At the same time, we find also evidence that the presence of private equity investors is related in some cases to distress for firms involved in LBO transactions.

Keywords: LBO, Governance, Private Equity, Asset Stripping, Employment, Distressed

Authors’ individual contribution: Conceptualization – V.C., R.G., and V.P.; Methodology – V.C. and R.G.; Validation – R.G. and V.P.; Formal Analysis – V.C. and V.P.; Writing – Original Draft – V.C. and R.G.; Writing – Review and Editing – R.G. and V.P.; Supervision – V.C. and V.P.

JEL Classification: G32, G34

Received: 05.10.2019
Accepted: 26.12.2019
Published online: 27.12.2019

How to cite this paper: Capizzi, V., Giovannini, R., & Pesic, V. (2019). Risk and perils in LBO transactions [Special issue]. Corporate Ownership & Control, 17(1), 306-324. https://doi.org/10.22495/cocv17i1siart12