Money Chasing Deals and Deals Chasing Money - The Impact of Supply and Demand on Buyout Performance

Cahier de recherche du Groupe HECThis paper analyzes the impact of differences in supply of and demand for private equity financing on the performance of buyouts. Using a unique and proprietary sample of 684 buyout investments in North America and Europe, we show that buyout performance (a) decreases when large volumes of private equity commitments are looking for suitable acquisition targets and (b) increases when macroeconomic conditions are such that demand for private equity financing is high. These findings remain unchanged if we control for the idiosyncrasies of individual investment periods, transaction size, holding period and industry sector of individual investment and the vintage year, the size or the age of the investing private equity fund. Our results support the view that the market for buyout target companies is not necessarily efficient, but that instead acquisition prices (and thereby transaction performance) depend on the competition by a limited number of private equity fund managers for a limited number of attractive investment opportunities