Phase 4 Private Equity Development: Reshaping Buyout Industry Dynamics and Review of Ethics

Open Access
Oh, Eric Junwoo
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Mark Richard Gruskin, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
  • Investment Banking
  • Leveraged Buyout
  • Mergers & Acquisitions
  • Private Equity
  • Business Ethics
This paper studies changing dynamics in the private equity industry following the 2008 financial crisis using empirical evidence collected from 261 leveraged buyouts completed between 2008 and 2017. This period is identified as phase 4 of private equity development with phase 1 being 1970~1990, phase 2 being 1990~2000, and phase 3 being 2000~2008. By comparing the phase 1~3 literature and data on private equity LBOs to that of phase 4, trends in the environment of private equity fundraising, net-IRR, and leverage capacity is measured. This study also investigates the following deal characteristics of phase 4 LBOs: exit strategy, holding period, valuation, as well as the role of investment bankers. This paper provides extensive literature reviews on informational asymmetries, corporate governance, employment, operations, and investor-manager wealth transfer effect of leveraged buyouts with a focus on ethics. Using phase 4 samples, industry-adjusted abnormal improvement in operating efficiency and expense management on a pre-interest earnings basis is measured. On the other hand, substantial financial leverage from LBO financing is retained throughout the private equity ownership period. Because of high leverage, phase 4 LBO firms underperform (industry adjusted) after taking interest expense into account. Changes in employee headcount for phase 4 LBOs are also investigated.