More Competition, Better Buyouts? When Private Equity Sponsors Compete for Deals

This paper studies, both theoretically and empirically, how competition among private equity (PE) sponsors for leveraged buyout (LBO) targets shapes deal outcomes. Empirically, we document that sponsor competition and deal multiples have increased over time. We further show that greater competition is associated with a shift toward smaller but higher-quality targets, characterized by lower default risk, stronger operating performance, and lower leverage. In a search-and-matching model of the LBO market, we show that greater competition raises acquisition prices, making low-quality deals more costly to pursue and strengthening sponsors' incentives to screen targets. It also pushes sponsors toward less-contested pools of smaller firms, while encouraging greater specialization and more intensive post-buyout engagement. A calibrated version of the model quantifies how the rise in competition over recent decades has significantly reduced PE returns.