The Opportunity Cost of Capital of US Buyouts
65 Pages Posted: 16 Jan 2006 Last revised: 7 Jun 2009
There are 3 versions of this paper
The Opportunity Cost of Capital of US Buyouts
The Opportunity Cost of Capital of US Buyouts
The Opportunity Cost of Capital of Us Buyouts
Date Written: March 3, 2009
Abstract
This paper addresses the problem to accurately determine buyout opportunity cost of capital for performance analyses. It draws on a unique and proprietary set of data on 133 US buyouts between 1984 and 2004. For each of them, we determine a public market equivalent that matches it with respect to its timing and its systematic risk. We show that under realistic mimicking conditions, the average opportunity cost of capital is below the commonly used benchmark S&P 500. The surprising result has a simple explanation: ex post, many of the transactions mimicking the buyouts would have defaulted in the public market. Only under perfect market assumptions is the average opportunity cost of capital close to the average index return. Our sensitivity analyses highlight the necessity of a comprehensive risk-adjustment that considers both operating risk and leverage risk for an accurate assessment of buyout performance. This finding is particularly important as existing literature on that topic tends to rely on benchmarks without a proper risk-adjustment.
Keywords: Private Equity, Risk-Adjusted Performance, Buyout, Benchmarking Alternative Assets
JEL Classification: G11, G24, G32
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Steven N. Kaplan and Per Strömberg
-
By Steven N. Kaplan and Per Strömberg
-
Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets
By Ronald J. Gilson and Bernard S. Black
-
Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations
By Paul A. Gompers and Josh Lerner
-
Private Equity Performance: Returns, Persistence and Capital Flows
-
Private Equity Performance: Returns, Persistence and Capital
-
The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
-
Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
By Thomas F. Hellmann and Manju Puri