Why Are Buyouts Levered? The Financial Structure of Private Equity Funds

Ulf Axelson, Per Stromberg and Michael Weisbach
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Ulf Axelson: Stockholm School of Economics and SIFR

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Private equity funds are important actors in the economy, yet there is little analysis explaining their financial structure. In our model the financial structure minimizes agency conflicts between fund managers and investors. Relative to financing each deal separately, raising a fund where the manager receives a fraction of aggregate excess returns reduces incentives to make bad investments. Efficiency is further improved by requiring funds to also use deal-by-deal debt financing, which becomes unavailable in states where internal discipline fails. Private equity investment becomes highly sensitive to economy-wide availability of credit and investments in bad states outperform investments in good states.

Date: 2008-09
New Economics Papers: this item is included in nep-cta and nep-fmk
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Related works:
Journal Article: Why Are Buyouts Levered? The Financial Structure of Private Equity Funds (2009)
Working Paper: Why are Buyouts Levered? The Financial Structure of Private Equity Funds (2007)
Working Paper: Why are Buyouts Levered: The Financial Structure of Private Equity Funds (2007)
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