The opportunity cost of capital of US buyouts

Alexander P. Groh () and Oliver Gottschalg
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Alexander P. Groh: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Oliver Gottschalg: HEC School of Management

No D/780, IESE Research Papers from IESE Business School

Abstract: This paper addresses the problem of accurately determining buyout opportunity cost of capital for performance analyses. It draws on a unique and proprietary set of data on 133 United States buyouts between 1984 and 2004. For each buyout, we determine a public market equivalent that matches the buyout in timing and systematic risk. We show that under realistic mimicking conditions, the average opportunity cost of capital is below the commonly used benchmark S&P 500. The surprising result has a simple explanation: ex post, many of the transactions mimicking the buyouts would have defaulted in the public market. Only under relaxed assumptions, is the average opportunity cost of capital close to the average index return. Our sensitivity analyses highlight the need for a comprehensive risk adjustment that considers both operating risk and leverage risk for an accurate assessment of buyout performance. This finding is particularly important as existing literature on this topic tends to rely on benchmarks without a proper risk adjustment.

Keywords: Private Equity; Risk-Adjusted Performance; Buyout; Benchmarking Alternative Assets (search for similar items in EconPapers)
JEL-codes: G11 G24 G32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2009-02-05
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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