Online Event

Armin Schwienbacher
SKEMA Business School, France

Abstract:
Private equity (PE) firms participate in a large fraction of M&A transactions every year. They acquire companies using a significant amount of debt. Access to debt finance is therefore crucial, as it allows them to either make larger deals or reduce their own equity capital investment by using more leverage. Some of the larger PE firms also raise their own debt funds, and some of the funds are used to finance deals done by their own equity funds (“sponsored funds”). Sponsored deals raise questions as to whether they are as efficient as those financed by third-party debt funds, and whether this co-sponsorship strategy help explain their superior returns in the market. Two hypotheses predict different patterns of performance. On the one hand, these may benefit both the equity and debt side of the PE firm’s investors, since PE firms may use private information collected during the due diligence made by the equity fund to let their debt fund participate in the best deals (which we call the “information advantage” hypothesis). On the other hand, a conflict of interest may arise if the PE firm uses its debt fund to finance deals initiated by its equity funds but the terms offered to the debt fund are below market equilibrium (the “conflict of interest” hypothesis.

Using detailed deal-level transaction data from the CEPRES database covering 1,257 unique LBO deals we find that at the transaction level, same-sponsor debt funds under-perform relative to independent debt funds, while same-sponsor equity funds over-perform relative to independent equity funds. This leads us to conclude that in same-sponsor deals, debt fund investors get expropriated by equity fund investors, relative to non-sponsored deals; this is consistent with our second view (“conflict of interest” hypothesis). Having established that a transfer takes place, we investigate several questions that help us obtain a better picture of the phenomenon.

Armin Schwienbacher is a permanent professor of finance at SKEMA Business School since 2010. He previously worked at the Université Lille 2 (France), Louvain School of Management (Université catholique de Louvain, Belgium) and Universiteit van Amsterdam (the Netherlands), and as guest lecturer at Duisenberg School of Finance (the Netherlands), Rotterdam School of Management (the Netherlands) and the European School of Management and Technology (Germany).

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