Determinants of buyout activity: Evidence from the United Kingdom

In this thesis, I study how various macro-level determinants explain the buyout activity in the United Kingdom. Thus, the focus of this thesis is to provide further understanding why buyout transactions face periods of booms and busts. Specifically, I analyze how the state of economy and capital market factors, i.e. the market risk premium and credit factors, have impact on the volume and value of buyout transactions. Furthermore, I study the potential effects of the Brexit referendum on the U.K. buyout activity. To the best of my knowledge, this is one of the first few studies that aim to analyze whether the Brexit referendum appears to have impact on the U.K. buyout market. My data sample consists of 940 buyout transactions that are conducted in the U.K. during 1993-2017. This data is obtained from Thomson Reuters SDC Platinum database. I focus on the U.K. buyout transactions for three reasons. First, most of the prior studies have analyzed the U.S. private equity market and second, the U.K. buyout market has historically been the most active in Europe. Third, by using the data sample of U.K. buyouts, I am able to conduct the analysis concerning the potential effects of the Brexit referendum on the U.K. buyout activity. As explanatory variables, this study uses an indicator for the state of economy, two alternative factors for the expected market risk premium and three credit factors. As the main methodology, I use parametric and non-parametric statistical tests as well as OLS regression analysis. My results suggest that private equity firms tend to undertake more and larger buyout investments when the economy is in a good state. Namely, buyout transactions appear to follow a pro-cyclical pattern. This result is in line with the prior findings in the existing literature. Additionally, my results indicate that the market risk premium and credit factors are significant determinants of the buyout activity. Consequently, private equity firms appear to be more willing to undertake new targets and especially conduct larger transactions in times of favorable credit conditions and low market risk premium. Based on the conducted analyses, I also find evidence that the Brexit referendum held in summer 2016 has affected negatively on the U.K. buyout activity. Especially, the share of cross-border deals has decreased after the referendum. This indicates that the U.K. companies have become less attractive investment opportunities from the perspective of non-U.K. private equity firms