The Evolution of Buyout Pricing and Financial Structure in the 1980s

S. N. Kaplan · Jeremy C. Stein

448 citations0/0 files storedThe Quarterly Journal of Economics

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Private Equity and Venture Capital Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

We examine changes in the pricing and financial structure of large management buyouts in the 1980s. Over time, (1) buyout price to cash flow ratios rose in absolute terms (particularly in deals financed using public junk bonds); (2) required bank principal repayments accelerated, leading to sharply lower ratios of cash flow to total debt obligations; (3) private subordinated and bank debt were replaced by public junk debt; and (4) management teams and dealmakers took more money out of transactions up front. These patterns are consistent with an “overheating” phenomenon in the buyout market. Preliminary post-buyout evidence lends some support to this interpretation.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1994Anatomy of Financial Distress: An Examination of Junk-Bond Issuers

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1995The Valuation of Cash Flow Forecasts: An Empirical Analysis 2009Unstable banking 2011Do Buyouts (Still) Create Value?2006Public policy and the creation of active venture capital markets 2012Corporate Governance and Value Creation: Evidence from Private Equity 2013Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts 2013Issuer Quality and Corporate Bond Returns 2007Private equity, leveraged buyouts and governance

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