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What Drives Buyout Booms and Busts?

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Abstract

Buyout activity by financial investors fluctuates substantially over time. In the United States, peak years result in close to one hundred public-to-private buyout transactions and trough years in as few as ten. The typical buyout is primarily funded by debt, hence the term 'leveraged buyout' (or LBO). As a result, analysis of buyout fluctuations has focused on the availability and cost of debt financing. However, in a recent staff report, we find that the overall cost of capital, rather than debt alone, is the primary driver of buyout activity. We argue that it is the common changes in both the cost of debt and the cost of equity--the aggregate risk premium--that are the source of booms and busts in buyout activity.

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  • Valentin Haddad & Erik Loualiche & Matthew Plosser, 2015. "What Drives Buyout Booms and Busts?," Liberty Street Economics 20150601, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87035
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    Keywords

    buyouts; cycles; cost of capital; risk premiums;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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