Does the credit market induce an industry effect in Private Equity?: An empirical study of Private Equity activity on industry level

Abstract: Using a sample of 25,682 private equity deals from 1986-2009 we investigate the relationship between Private Equity activity and the credit market as well as the relative valuation of the industry of the target firm. Our results show that buyout activity is negatively related to the credit spread between high yield bonds and LIBOR. We find some evidence for that the credit spread is positively associated with the concentration of buyout activity across industries. Our study does not find evidence that the credit markets and the relative valuation of the target company’s industry explain changes in the distribution of private equity activity on industry level. Our results also indicate that the relative valuation of the target company’s industry is negatively related to excess returns from multiple expansion over different hypothetical holding periods. Finally, we show that private equity companies invested in industries where multiple expansion was superior to the benchmark multiple expansion of the economy on average, hence earning excess returns from industry picking.