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

Ulf Axelson, Per Stromberg and Michael Weisbach

Journal of Finance, 2009, vol. 64, issue 4, 1549-1582

Abstract: Private equity funds are important to 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 aggregate credit conditions and investments in bad states outperform investments in good states.

Date: 2009
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https://doi.org/10.1111/j.1540-6261.2009.01473.x

Related works:
Working Paper: Why Are Buyouts Levered? The Financial Structure of Private Equity Funds (2008)
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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