What Drives Buyout Booms and Busts?

Valentin Haddad, Erik Loualiche and Matthew Plosser

No 20150601, Liberty Street Economics from Federal Reserve Bank of New York

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.

Keywords: buyouts; cycles; cost of capital; risk premiums (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2015-06-01
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