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The Global Economic Impact of Private Equity Report 2008

The Global Economic Impact of Private Equity Report 2008


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Globalization of Alternative Investments
Working Papers Volume 1
The Global Economic Impact of Private Equity Report 2008
Globalization of Alternative Investments
Working Papers Volume 1
The Global Economic Impact of Private Equity Report 2008

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Published by: World Economic Forum on Sep 30, 2008
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A. Sample construction

We use the Capital IQ database to construct a base sample
of leveraged buyout transactions. We frst select all the M&A
transactions classifed as “leveraged buyout”, “management
buyout” and “JV/LBO” in Capital IQ that were announced
between 1 January 1970 and 30 June 2007. To this sample
we add all M&A transactions undertaken by a fnancial
sponsor classifed as investing in “buyouts”. This results in
a sample of about 23,500 transactions. For the purposes
of this study, we then exclude acquisitions that were
announced but not yet completed, acquisitions of non-
control stakes, acquisitions of stakes in public companies
that remain publicly traded (PIPES) and other misclassifed

The Global Economic Impact of Private Equity Report 2008

Large-sample studies: Demography

transactions. This leaves us with a total sample of 21,397
leveraged buyout transactions over the period 1 January
1970 to 30 June 2007, involving 19,500 distinct frms.

In order to track the ultimate fate of these transactions,
we frst match this sample with the Capital IQ acquisition
database to obtain any subsequent M&A transactions
that our LBO frms have been involved in. This gives
us information which is used to infer trade-sale exits,
divestments and add-on acquisitions. We then match
our sample frms with the SDC, Capital IQ and the Cao
and Lerner (2006) IPO databases to track down prior
and subsequent initial public offerings. Finally, we
conduct extensive web searches on a frm-by-frm
basis to infer the ultimate outcomes of these transactions.

B. Sample selection issues

Although we believe we have constructed the most
comprehensive database of LBO transactions to date, we
will still only have a partial coverage of these transactions
for a couple of reasons.

First, our sampling methodology does not pick up all
the LBO transactions in the Capital IQ database, due to
the nature of the Capital IQ classifcation methodology.
For example, one of the more notable LBOs of the 1980s,
Campeau’s acquisition of Federated Department Stores
(see Kaplan 1989c) is in the Capital IQ database but not
classifed as a leveraged buyout transaction. Also, a
substantial number of the transactions by buyout funds are
classifed as “private placements” rather than acquisitions.
In most cases, these are not proper LBO transactions,
but rather acquisitions of minority stakes or follow-on
investments and for this reason we do not want to include
transactions classifed as private placements in our sample.
Still, there are cases where the distinction is not clear and
some of the private placements should probably have been
included in the database. To correct these classifcation
errors we would have to check each transaction on a case-
by-case basis, which would not be practical given that there
are more than 200,000 M&A and private placement
transactions in Capital IQ.

Secondly, even when the Capital IQ classifcation is correct,
there are quite a few judgement calls that have to be made.
The distinction between a PIPE and minority transaction and
a proper leveraged buyout is not always clear. Similarly, some
LBO deals are more akin to venture capital investments.
We try to err on the side of not including any non-LBO
transactions, but this means that some real leveraged buyouts
will be excluded as a result. Moreover, we do not include add-
on acquisitions by LBO frms as separate LBO transactions,
although again the distinction is not necessarily all that clear.

Thirdly, Capital IQ started their data service in 1999 and
their coverage has increased over time. Although Capital IQ
has been back-flling its data using various sources, their
coverage is likely to be incomplete for the earlier part of the

sample. To gauge the extent of this attrition, we compare
our sample with that used in academic studies on US
transactions in the 1980s. In particular, we compare our
sample with Lehn and Poulsen’s (1989) sample of going-
private transactions from 1980 to 1987, Kaplan’s (1991)
sample of LBOs above $100 million in transaction value
from 1979 to 1986, Long and Ravenscraft’s (1993) sample
of LBOs of independent frms from 1981to 1987 (i.e.
excluding divisional buyouts) and Cotter and Peck’s (2001)
comprehensive sample of buyouts between 1984 and 1989.
We summarize the results from this analysis in Table 1.

Overall, the attrition rate seems signifcant. The worst
comparative coverage seems to be with respect to Lehn
and Poulsen (1989), where the number of public-to-private
transactions in our data is only 16% of the number identifed in
their paper. In comparison, looking at Long and Ravenscraft’s
(1993) sample of LBOs of independent companies during the
same period, the coverage is substantially higher, i.e. 41%.
This seems to indicate that some of the public-to-private
transactions of Lehn and Poulsen, most likely the smaller ones,
have been (mis)classifed as private-to-private transactions in
Capital IQ. Moreover, coverage improves signifcantly towards
the end of the 1980s. For the 1984–1989 period, our sample
size includes as much as 70% of the number of observations
in Cotter and Peck (2001), compared with 41% for the
1981–1987 sample of Long and Ravenscraft (1993). Finally,
the largest source of attrition in Capital IQ is among “pure
management buyouts”, i.e. LBO transactions that are not
sponsored by a buyout fund or another fnancial institution.
Looking only at large LBOs with a fnancial sponsor during
the 1979–1986 period, we pick up 62 transactions, compared
with Kaplan’s (1991) sample of 74 transactions, i.e. a coverage
of 84%.

In our efforts to evaluate attrition rates outside the US, we
are limited by the scarcity of international studies on leveraged
buyouts. Wright et al (2006) report statistics on UK and Western
European buyout transactions collected by the Centre for
Management Buyout Research at Nottingham University
Business School, which allows some suggestive comparisons,
also reported in Table 1. According to this paper, there were
167 buyouts in the UK and Continental Europe in 1986, while
our Capital IQ sample only includes 28, i.e. 17% of the sample
size. Even for the later sample period, Capital IQ only seems to
cover 30–40% of UK buyouts, while the Capital IQ coverage of
Western European deals is more than four times larger for the
period 2001–2005. Since Wright et al do not explicitly state their
inclusion criteria, it is hard to identify the sources of these
discrepancies. Still, it seems plausible that our sample may
under-report smaller UK buyout transactions, but that
international coverage is improving over time.

To summarize, in interpreting the results of the analysis below
we have to be aware of a few sample selection biases. Given
that coverage is improving over time, we are understating
the number of transactions that occurred in the 1970s and
1980s, while the coverage from the mid-1990s onwards

The Global Economic Impact of Private Equity Report 2008

Large-sample studies: Demography

should be fairly complete. While the coverage of larger deals
with fnancial sponsors is likely to be higher than 80% in the
early parts of the sample, we are missing a substantial
number of smaller transactions and transactions without
fnancial sponsors before the mid-1990s. We are likely to
cover at least 70% of all US deals after 1984, at least to the
extent they could be identifed with the databases available
at the time. Finally, there are reasons to believe that the
coverage of LBO deals outside the United States suffers
from even larger attrition rates. Hence, part of the dramatic
increase in buyout activity that we document in the last
decade may be overstated due to sample selection bias.

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