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 and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. However, we find that, on average, public companies benefit when they buy financial sponsors' portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run posttransaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. 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. This paper was accepted by Brad Barber, finance.