The Capital Structure of Private Equity Buyouts

This work examines the determinants of the capital structure of private equity buyouts. While firm specific characteristics, measured by conventional determinants of capital structure and proxies for isolated capital structure theories, have a very large impact on the firm's pre-buyout capital structure, this influence largely disappears after the firm is bought out. This result is very peculiar, especially when related to Jensen's (1986) free cash flow theory, which is predicted to be especially valid for buyouts. Next to the firm specific characteristics, the impact of market characteristics at the announcement date of the buyout is also taken into account. While no relation between market characteristics and post buyout capital structures is found, market timing provides some explanation for added leverage. Although only moderate influences of firm and market characteristics are found, the results show that much leverage is added without firm or market characteristics to account for this, indicating that no existing capital structure theory can fully explain the large amounts of added debt in private equity buyouts.