Buyout Activity and the Equity Risk Premium - Evidence from the U.K.

Sammanfattning: We study the relationship between the aggregate risk premium, public-to-private leveraged buyout(LBO) activity, and target betas in the U.K. following recent literature covering the topic in a U.S. setting. In addition, we revisit the U.S. market and relate LBO fundraising activity to variations in the U.S. equity risk premium. Our samples include 1331 U.S. LBOs and 375 U.K. LBOs covering 1982Q4 - 2016Q4 and 1998Q2 - 2016Q4 respectively. Our findings in the U.K. are in line with the evidence documented in the U.S. and further support the notion that variations in the risk premium is a key driver of LBO activity. However, in the U.S. data, we find that the statistical significance of the results is sensitive to how the risk premium is estimated. In particular, a risk premium estimated with an updated version of cay, a proxy for the consumption-wealth ratio, leaves most results insignificant. We also find that in contrast to the U.S., target betas in the U.K. are lower when LBO activity is high. Finally, our fundraising data suggests that the decision by limited partners to invest in private equity may also be highly influenced by fluctuations in the risk premium.