Do Private Equity Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties, or from a focus on short-term profits at the expense of long-term value. Bondholders and buyers of private equity portfolio companies represent the two potential sources of wealth transfers. Yet, we find that public companies benefit when they buy financial sponsors’ portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run post-transaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity have no relation to future portfolio company distress, suggesting that bondholders are not suffering systematic wealth losses, either. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism. * We thank Adlai Fisher, Weili Ge, Rocky Higgins, Paul Malatesta, Jon Karpoff, Jennifer Koski, Wayne Mikkelson and participants at the 2010 Pacific Northwest Finance Conference and at seminars at Arizona State University, Southern Methodist University, and the University of Washington for helpful comments. C. Lamar Grant, Jared Stanfield, Robert Schonlau, and Wei Ming Lee provided excellent research assistance. A previous version of this paper was titled, “How do private equity sponsors create value? Evidence from a comprehensive sample of large buyouts.”