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Newsletter
Understanding the new world order of private equity
The Federal Reserve System?s Private Equity Merchant Banking Knowledge Center, formed at the Chicago Fed in 2000 after the passage of the Gramm?Leach?Bliley Act, sponsors an annual conference on new industry developments. This article summarizes the tenth annual conference, The New World Order of Private Equity, held on July 21?22, 2010.
Discussion Paper
The Private Premium in Public Bonds?
In a 2012 New York Fed study, Chenyang Wei and I find that interest rate spreads on publicly traded bonds issued by companies with privately traded equity are about 31 basis points higher on average than spreads on bonds issued by companies with publicly traded equity, even after controlling for risk and other factors. These differences are economically and statistically significant and they persist in the secondary market. We control for many factors associated with bond pricing, including risk, liquidity, and covenants. Although these controls account for some of the absolute pricing ...
Working Paper
Pre-LBO Credit Market Conditions and Post-LBO Target Behavior
In the context of leveraged buyouts (LBOs), this paper empirically studies the relation between pre-buyout credit market conditions and the post-buyout behavior of target companies, employing a supervisory dataset to overcome limited data availability for post-buyout target financial information. We propose an LBO-specific measure of (changes of) credit market conditions---the short-term (6-month) change of credit spreads leading up to buyout close. Using this proposed measure, we show that loosening pre-LBO credit market conditions, which are related to higher buyout leverage consistent with ...
Working Paper
Private equity premium in a general equilibrium model of uninsurable investment risk
This paper studies the quantitative properties of a general equilibrium model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks in the presence of a borrowing constraint. The calibrated model matches the highly skewed wealth and income distributions of entrepreneurs. The authors provide an accurate solution to the model despite the significant nonlinearities that are absent in the economy with uninsurable labor income risk. The model is capable of generating the average private equity premium of roughly 3 percent and a low risk-free rate. ...
Working Paper
How Private Equity Fuels Non-Bank Lending
We show how private equity (PE) buyouts fuel loan sales and non-bank participation in the U.S. syndicated loan market. Combining loan-level data from the Shared National Credit register with buyout deals from Pitchbook, we find that PE-backed loans feature lower bank monitoring, lower loan shares retained by the lead bank, and more loan sales to non-bank financial intermediaries. For PE-backed loans, the sponsor's reputation and the strength of its relationship with the lead bank further reduce the lead bank's retained share and monitoring. Our results suggest that PE sponsor engagement ...
Working Paper
Does Private Equity Over-Lever Portfolio Companies?
Detractors have warned that Private Equity (PE) funds tend to over-lever their portfolio companies because of an option-like payoff, building up default risk and debt overhang. This paper argues PE-ownership leads to substantially higher levels of optimal (value-maximizing) leverage, by reducing the expected cost of financial distress. Using data from a large sample of PE buyouts, I estimate a dynamic trade-off model where leverage is chosen by the PE investor. The model is able to explain both the level and change in leverage documented empirically following buyouts. The increase in optimal ...
Newsletter
Navigating the new world of private equity - a conference summary
The Federal Reserve System's Private Equity Merchant Banking Knowledge Center, formed at the Chicago Fed in 2000 shortly after the passage of the Gramm?Leach?Bliley Act, sponsors an annual conference on new industry developments. This article summarizes the 2008 conference held on July 9 - 10.
Discussion Paper
Corporate Landlords, Institutional Investors, and Displacement: Eviction Rates in SingleFamily Rentals
In this research we document the eviction crisis in the city of Atlanta and adjacent suburbs. We place eviction-driven housing instability in the broader context of changing housing markets, examining the relationships between post-foreclosure single-family rentals, large corporate landlords, and eviction rates. The rise of the large corporate landlord in the single-family rental market has the potential to rehabilitate vacant properties and offer affordable housing in desirable neighborhoods, or conversely could perpetuate housing instability and spatial inequality. To understand the ...
Newsletter
When worlds collide: the altered state of private equity - a conference summary
The Federal Reserve System?s Private Equity Merchant Banking Knowledge Center, formed at the Chicago Fed in 2000 after the passage of the Gramm-Leach-Bliley Act, sponsors an annual conference on new industry developments. This article summarizes the ninth annual conference, held on June 25-26, 2009.