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Fall 2006

Do LBO funds create value for investors

By: Ted Barnhill, Jeff Hooke, and K.C. Chang


Over the last twenty-years the number of private equity funds concentrating on leveraged buyouts (LBO) has increased dramatically.  These funds focus on buying companies with moderate price earnings ratios and stable cash flows.  Such buyouts are typically financed with 75 to 80 percent debt.  After the firms are acquired they are reorganized and/or liquidated.  The LBO fund managers typically receive significant management fees and profit participations.  This paper focuses on a comparison of the realized returns generated by LBO fund investors as compared to those that could have been achieved by buying shares in a portfolio of similar companies and financing such portfolios with 75 percent debt (i.e. “synthetic LBO funds).  The study will shed important insights into the question of whether LBO fund managers in general create added value for their investors.  It will also assess whether certain LBO funds tend to significantly out perform other LBO funds. Finally the study will assess alternative strategies for the optimal selection of securities for inclusion in “synthetic LBO funds”.


We have to date identified and obtained access to data sources for undertaking the study.  In addition programs have been completed to allow the identification of companies that meet typical SIC code, price earnings ratio, and cash flow stability criteria for LBO’s.  These programs have been implemented with the identification of potential LBO companies yearly over the 1985 to 2005 period.  Current efforts focus on developing the programs for estimating the returns on various LBO funds.