The Determinants of Leverage in Buyouts Before and After the Financial Crisis of 2008

Abstract: The number of leveraged buyouts has grown tremendously in both size and frequency during the last decades. Therefore Private Equity firms are large and important players in capital markets, why it is interesting to examine the motivation behind their financing choices. The purpose of this thesis is to examine what factors determine leverage in LBOs and if the effect differ after the financial crisis of 2008. Using a sample of 310 LBOs from 1998 to 2015, and a matched sample of public companies, we find evidence that LBO leverage is primarily driven by time-series variation in debt market conditions. Cross-sectional factors suggested by the trade-off theory and the pecking order theory, do not apply for LBOs. We find no significant effect suggesting that the factors determining leverage differ for LBOs after the crisis. However, the results suggest, contrary to before the crisis, that the sample of matched public companies have a countercyclical rather than pro-cyclical relation to debt market conditions post-crisis. This infers that the effect of the determinants of public leverage are closer to the effect of the determinants of LBO leverage post-crisis.