Master-Arbeit Univ. St. Gallen, 2008.

74 ABSTRACT This thesis deals with the private equity industry. Its aim is to coherently introduce private equity as a distinctive and integral part of today's economy, to provide relevant insight on the principles of functioning of private equity business model, and to analyse the mechanism of the most commonly used private equity transaction type. The thesis is structured into three chapters with each chapter being dedicated to one of the sub-aims. First chapter defines the notion of private equity and discusses the history of the industry and its economic performance. Private equity encompasses all types of equity investments into non-publicly traded companies. The industry itself has been gaining on significance since its emersion in the 1980s, mainly due to the fact that private equity investments have been consistently outperforming public markets in terms of realized returns. Second chapter is dedicated to the business model of private equity funds, their structure and lifecycle, as well as the investment process itself. Private equity funds take on the limited partnership legal form, which is managed by a professional private equity house while the investors' involvement consists solely in the provision of capital. A fund's lifetime is usually limited by a period of ten years and its lifecycle is...

The capital structure of leveraged buyout (LBO) companies often differs dramatically from that of other companies. What factors drive the amount of leverage in LBO transactions are often contrasted by two different views in previous research. The first view, based on the trade-off theory and the pecking order theory, states that leverage is driven by traditional firm characteristics. The second view, based on the market timing theory, instead states that leverage in LBOs foremost is driven by whether or not conditions in the credit market are favorable. Previous research that has investigated LBO companies' leverage in particular has voiced concerns that the first view that stems from classic capital structure theories may not be completely applicable on LBO companies.  The purpose of this paper is to examine what drives leverage in Swedish LBOs between the years of 2001 and 2021. To do this, a univariate analysis has been conducted to investigate patterns in leverage in different states of the credit market. Furthermore, an econometric approach was taken in a multivariate analysis to analyze which factors drive leverage in Swedish LBOs. The results contradict previous LBO research to some extent as leverage in Swedish LBOs is not driven by credit market conditions nor firm specific characteristics, except for tangibility which has a positive impact on leverage in one setting.

Hoy en día, el Perú es un país que se influencia mucho de países internacionales, generando así necesidades de adaptación principalmente en el derecho societario, sin embargo, a la luz de la actualidad, se siguen verificando trabas respecto a las normas prohibitivas que, de alguna forma u otra, traban operaciones que en otros países se han podido flexibilizar. Una de las normas que da lugar al presente estudio de investigación es la figura denominada asistencia financiera prohibida, regulada en el artículo 106 de la Ley General de Sociedades, figura que en toda su trayectoria se ha restringido de una manera poco razonable. El propósito de este estudio es evaluar los fundamentos legales que permitan la flexibilización de las disposiciones sobre la asistencia financiera contenidas en el artículo 106 de la Ley General de Sociedades, en atención al Leveraged Buyout. Para lograr los resultados de nuestra investigación, se trazó dos objetivos: analizar el marco jurídico nacional de la asistencia financiera regulado en el art 106 de la Ley General de Sociedades y su tratamiento en el derecho comparado y analizar los fundamentos legales vinculada a la asistencia financiera, en atención al Leveraged buyout. En relación al primer punto, se llega a una probabilidad alta de certeza que su presencia carece de justificación, ya que se orienta hacia propósitos innecesarios o, en caso de atender a necesidades legítimas, lo hace de forma poco lógica. Respecto al segundo punto, tenemos una certeza absoluta que lamentable la regulación actual es restrictiva limitando numerosas estructuras de adquisición de acciones más de lo que una amplia gama de doctrinarios en la materia y juristas desearían reconocer. / Today, Peru is a country highly influenced by international nations, thereby generating adaptation needs primarily in corporate law. However, in light of the present situation, obstacles persist regarding prohibitive regulations that, in one way or another, hinder operations that have been able to be streamlined in other countries. One of the regulations that gives rise to this research study is the so-called prohibited financial assistance, regulated in Article 106 of the General Law of Companies, a provision that throughout its history has been unreasonably restricted. The purpose of this study is to evaluate the legal foundations that allow for the flexibility of the provisions on financial assistance contained in Article 106 of the General Companies Law, in relation to Leveraged Buyouts. To achieve the results of our research, two objectives were outlined: to analyze the national legal framework of financial assistance regulated in Article 106 of the General Law of Companies and its treatment in comparative law, and to examine the legal foundations related to financial assistance, in relation to Leveraged Buyouts. In relation to the first point, it is highly likely that its presence lacks justification, as it is geared towards unnecessary purposes or, if it addresses legitimate needs, it does so in a somewhat illogical manner. Regarding the second point, we have absolute certainty that the current regulation is regrettably restrictive, limiting numerous structures for share acquisition more than what a wide range of scholars in the field and legal practitioners would wish to acknowledge.

This paper-based dissertation discusses applications of asset pricing using the methodology of stochastic modelling for different questions in corporate finance and comprises three essays. The first essay reconsiders the pricing of a firm by more appropriately quantifying one component of the APV equation, i.e., the tax savings. This study proposes a state dependent taxation of a cancellation of indebtedness (COD), reflecting the diverse national tax systems more realistically and investigates whether this has an impact on the value of a leveraged firm. The second essay quantifies the performance measure of a leveraged buyout (LBO) and facilitates the optimization of this figure by searching for an optimal redemption policy within the firm’s financial structure. Further evidence is brought to the often-discussed consideration between the internal rate of return (IRR) and the net present value (NPV) as investment decision criteria. The third and last essay prices a common clause in mergers and acquisitions (M&A) transactions – the earnout - by revisiting a prominent assumption about the payoff modeling in standard corporate finance literature. While current literature on pricing contingent claims mainly relies on the standard Black-Scholes-Merton framework, this study investigates whether a more realistic modelling by introducing stochastic jumps into the EBIT of firm earnout clauses to be mispriced under standard models.

The aim of this thesis is description and understanding of private equity industry as a part of alternative asset class. In the first part, we describe the basic concepts of private equity industry and characteristics of individual subjects present in this sector. Analysis of the industry and basic comparison of private equity in Europe and United States is the theme of the second part of this paper. The base of knowledge created in the previous parts supports the analysis of buyouts and their value creation strategies. On the example of Kohlberg Kravis Roberts, pre-eminent private equity firm, we show how private equity works in practice and what current trends in the industry are. In the end, we estimate the subjective value of one unit of ownership in KKR and list that risks could affect the company and the industry.

This paper examines the main drivers of leverage levels in private equity-sponsored leveraged buyouts (LBOs). In order to find out what drives LBO leverage, we analyse deal financing of 71 European LBO deals completed between 2005 and 2015. By conducting univariate t-test and multiple regression analysis, we analyse the predictive power of a number of classical capital structure determinants (i.e. firm-specific factors) on levels of debt financing in LBOs. In addition, the state of the credit market is considered as a potential determinant of LBO leverage. We find that credit market conditions have a significant effect on levels of debt financing in LBOs and suggest that the market timing theory can explain LBO leverage better than classical leverage determinants, i.e. firm specific factors derived from classical capital structure theories. The results also indicate a negative relationship between target firms’ tax rate and LBO leverage. We also find that target firms’ free cash flow prior to buyout has no significant impact on leverage in LBOs, something that contradicts much previous research.

<p>During the eighties a new type of financial transaction started to emerge on an increasing basis. It was the so called “leveraged buyout” also known as the LBO. In the US private equity firms made it to the headlines in financial media from engaging in leveraged buyouts with small equity investments and large amounts of borrowed capital, their targets where large solid multinational corporations. Much has happened since the eighties. Back then leveraged buyouts where often associated with terms such as “Slash and Burn” or “Buy, Flip and Strip” often meaning hostile takeovers and huge layoffs. Today private equity firms focus more on active ownership, fast decisions without the bureaucracy of the stock market and long term value creation in order to profit from their buyouts.</p><p>As private equity firms today invest tremendous amounts of capital through their private equity funds. Leveraged buyouts have become one of the major areas within investment banking. Even though the LBO is a common transaction it is often hard to find models used for valuation of such a deal. Private equity funds and investment banks all have their own valuation models but these are regarded as strictly confidential and seldom revealed to the public. Therefore the creation and publication of an LBO valuation model should be of great interest for everyone aiming at a future career within private equity, corporate finance or investment banking.</p><p>This thesis derives a complete LBO valuation model including a framework for finding a suitable LBO target. The LBO valuation model is created in cooperation with the debt capital markets department at one of the leading investment banks in the Nordic region. The framework is based on a qualitative study conducted on seven of the most distinguished private equity firms active in Sweden. In order to show how the LBO valuation model and the framework works, both are applied on the retail company Björn Borg listed on NASDAQ OMX. To verify the accuracy of the framework, calculated return from the model is analyzed and compared to the indications given by the framework.</p>

During the eighties a new type of financial transaction started to emerge on an increasing basis. It was the so called “leveraged buyout” also known as the LBO. In the US private equity firms made it to the headlines in financial media from engaging in leveraged buyouts with small equity investments and large amounts of borrowed capital, their targets where large solid multinational corporations. Much has happened since the eighties. Back then leveraged buyouts where often associated with terms such as “Slash and Burn” or “Buy, Flip and Strip” often meaning hostile takeovers and huge layoffs. Today private equity firms focus more on active ownership, fast decisions without the bureaucracy of the stock market and long term value creation in order to profit from their buyouts. As private equity firms today invest tremendous amounts of capital through their private equity funds. Leveraged buyouts have become one of the major areas within investment banking. Even though the LBO is a common transaction it is often hard to find models used for valuation of such a deal. Private equity funds and investment banks all have their own valuation models but these are regarded as strictly confidential and seldom revealed to the public. Therefore the creation and publication of an LBO valuation model should be of great interest for everyone aiming at a future career within private equity, corporate finance or investment banking. This thesis derives a complete LBO valuation model including a framework for finding a suitable LBO target. The LBO valuation model is created in cooperation with the debt capital markets department at one of the leading investment banks in the Nordic region. The framework is based on a qualitative study conducted on seven of the most distinguished private equity firms active in Sweden. In order to show how the LBO valuation model and the framework works, both are applied on the retail company Björn Borg listed on NASDAQ OMX. To verify the accuracy of the framework, calculated return from the model is analyzed and compared to the indications given by the framework.

Master-Arbeit Univ. St. Gallen, 2007.