IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

The risk appetite of private equity sponsors

Author Info

Listed author(s):
  • Braun, Reiner
  • Engel, Nico
  • Hieber, Peter
  • Zagst, Rudi
Registered author(s):

    Abstract

    Using a unique proprietary data set of 460 realized buyouts completed between 1990 and 2005, we examine the risk appetite of private equity (PE) sponsors in different states of the PE market and analyze key determinants of deal-level equity risk. We develop a new approach to mathematically model PE investment equity risk based on the Black-Cox default model. We find higher equity volatilities during boom periods. Further, deals conducted by more reputed PE sponsors have lower equity volatilities as they are unwilling to imperil their reputation by taking excessive risks. In addition, we find that PE sponsors' risk appetite is negatively related to the ownership stake in the buyout target company.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539811000466
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 18 (2011)
    Issue (Month): 5 ()
    Pages: 815-832

    as
    in new window

    Handle: RePEc:eee:empfin:v:18:y:2011:i:5:p:815-832
    DOI: 10.1016/j.jempfin.2011.07.002
    Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

    Keywords: Risk appetite; Equity volatility; Private equity;

    Find related papers by JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Groh, Alexander P. & Gottschalg, Oliver, 2009. "The opportunity cost of capital of US buyouts," IESE Research Papers D/780, IESE Business School.
    2. Green, Richard C., 1984. "Investment incentives, debt, and warrants," Journal of Financial Economics, Elsevier, vol. 13(1), pages 115-136, March.
    3. Shai Bernstein & Josh Lerner & Morten Sørensen & Per Strömberg, 2010. "Private Equity and Industry Performance," NBER Working Papers 15632, National Bureau of Economic Research, Inc.
    4. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    5. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
    6. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    8. Steven N. Kaplan & Per Stromberg, 2009. "Leveraged Buyouts and Private Equity," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 121-146, Winter.
    9. Paul Kofman & Ian G. Sharpe, 2003. "Using Multiple Imputation in the Analysis of Incomplete Observations in Finance," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 1(2), pages 216-249.
    10. Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, vol. 64(4), pages 1549-1582, 08.
    11. Opler, Tim & Titman, Sheridan, 1993. " The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs," Journal of Finance, American Finance Association, vol. 48(5), pages 1985-1999, December.
    12. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, 08.
    13. Chen, Nai-fu, 1983. " Some Empirical Tests of the Theory of Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 38(5), pages 1393-1414, December.
    14. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    15. Cochrane, John H., 2005. "The risk and return of venture capital," Journal of Financial Economics, Elsevier, vol. 75(1), pages 3-52, January.
    16. Shourun Guo & Edith S. Hotchkiss & Weihong Song, 2011. "Do Buyouts (Still) Create Value?," Journal of Finance, American Finance Association, vol. 66(2), pages 479-517, 04.
    17. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    18. Oliver Gottschalg & Alexander Peter Groh & Rainer Baule, 2008. "Measuring Idiosyncratic Risks in Leveraged Buyout Transactions," Post-Print hal-00758559, HAL.
    19. Victoria Ivashina & Anna Kovner, 2011. "The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2462-2498.
    20. Eling, Martin & Schuhmacher, Frank, 2007. "Does the choice of performance measure influence the evaluation of hedge funds?," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2632-2647, September.
    21. Ho, Thomas & Singer, Ronald F, 1984. "The Value of Corporate Debt with a Sinking-Fund Provision," The Journal of Business, University of Chicago Press, vol. 57(3), pages 315-336, July.
    22. Chan, K. C. & Chen, Nai-fu & Hsieh, David A., 1985. "An exploratory investigation of the firm size effect," Journal of Financial Economics, Elsevier, vol. 14(3), pages 451-471, September.
    23. Halpern, Paul & Kieschnick, Robert & Rotenberg, Wendy, 2009. "Determinants of financial distress and bankruptcy in highly levered transactions," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 772-783, August.
    24. Andrew Metrick, 2010. "The Economics of Private Equity Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2303-2341, June.
    25. Demiroglu, Cem & James, Christopher M., 2010. "The role of private equity group reputation in LBO financing," Journal of Financial Economics, Elsevier, vol. 96(2), pages 306-330, May.
    26. Gottschalg, Oliver & Groh, Alexander Peter & Baule, Rainer, 2008. "Measuring idiosyncratic risks in leveraged buyout transactions," Les Cahiers de Recherche 894, HEC Paris.
    27. Nikoskelainen, Erkki & Wright, Mike, 2007. "The impact of corporate governance mechanisms on value increase in leveraged buyouts," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 511-537, September.
    Full references (including those not matched with items on IDEAS)

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    as
    in new window


    Cited by:

    1. Braun, Reiner & Jenkinson, Tim & Stoff, Ingo, 2017. "How persistent is private equity performance? Evidence from deal-level data," Journal of Financial Economics, Elsevier, vol. 123(2), pages 273-291.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:18:y:2011:i:5:p:815-832. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.