Browsing by Author "Valkama, Petri Juhani"

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The impact of macroeconomic factors on leveraged buyout returns
(2009) Valkama, Petri Juhani
Helsinki University of Technology | Master's thesis
Leveraged buyouts are a significant factor in the modern financial markets and have attracted considerably academic interest. While there is a significant number of studies on their operating performance implications and fund returns, there is still a range of open questions regarding the drivers of investment level returns and the risk-return performance of buyouts. Only in the last two years have data availability and the methods to estimate the systematic risk of buyouts developed enough to make a reliable analysis of the return drivers and risk-return performance possible. This paper contributes to buyout literature by analyzing the impact of macroeconomic factors on levered buyout returns and the risk-return performance of buyouts compared to public equity. By employing quantile regression this study is, to the best of our knowledge, the first to analyze the differences in return drivers between high and low performing buyouts. In line with previous studies we find that buyouts are pro-cyclical in that their returns are driven by GDP growth and market returns. We further show that industry growth has actually a statistically more significant impact on returns than either GDP growth or market return, and emphasize the importance of using industry in addition to market level variables in future studies. Our results further indicate that the returns of poorer performing buyouts are actually driven by GDP rather than industry growth, where as the returns of well performing buyouts are driven by industry rather than GDP growth. This indicates that while good economic conditions help support the worst buyouts, a good choice of industry is needed to achieve top performance. Our results show that gearing has a strong impact on equity returns, but no such impact on enterprise value returns. We interpret this as a sing that gearing does not help to create value, but inflates equity returns by reducing the equity investment required. We also find that gearing only has an impact on the higher return quantiles, which supports the argument that it does not create value but helps inflate the returns from value creation. We find that buyouts clearly outperform public equity in the risk-return sense. The average levered alpha, although driven by few outliers, is as high as 99.9% and even the median alpha reaches considerable 17.5%, which is comparable with 12.6% average alpha by Groh and Gottschalg (2008). We estimate the average levered beta over holding time at 1.32, which is in line with the results of Groh and Gottschalg (2008).