Discussion Paper

What Drives Buyout Booms and Busts?

Abstract: Buyout activity by financial investors fluctuates substantially over time. In the United States, peak years result in close to one hundred public-to-private buyout transactions and trough years in as few as ten. The typical buyout is primarily funded by debt, hence the term 'leveraged buyout' (or LBO). As a result, analysis of buyout fluctuations has focused on the availability and cost of debt financing. However, in a recent staff report, we find that the overall cost of capital, rather than debt alone, is the primary driver of buyout activity. We argue that it is the common changes in both the cost of debt and the cost of equity--the aggregate risk premium--that are the source of booms and busts in buyout activity.

Keywords: buyouts; cycles; cost of capital; risk premiums;

JEL Classification: G1; G2; G3;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2015-06-01

Number: 20150601