Determinants of cross-border buyout performance

The leveraged buyout (LBO) is an important part of private equity (PE) investment. In simple terms it is the acquisition of a company, financed with a substantial portion of borrowed funds. The rationale for such a purchase is, naturally, to extract value. Typically, once the purchase is made, the PE firm will implement changes to improve the acquisition’s value with the aim to eventually exit the company (as PE funds have a limited contractual lifetime), and finally return capital to their investors.

Such PE investments can of course occur across borders as well as within the same country. Cross-border PE investments emerged as a phenomenon during the late 1990s. In the working paper, Cross-border Buyout Performance, the determinants of cross-border buyout performance based on the framework of institution are examined.

Using a novel dataset of 2,639 cross-border buyouts in 38 countries between 1998-2007, this research finds that the institutional quality of the country where the target company is based, as measured by its ranking in the composite index of political, economic and financial risk, is an important determinant of cross-border buyout performance, measured in terms of exit success.

When making their investment in countries of higher institution quality, those which offer stronger investor protection and contract enforcement and have less political, economic and financial uncertainty, and lower transaction costs, PE firms are more likely to achieve a successful exit from the acquired company, either through IPO or M&A.

The study found that PE firms’ international experience, industrial experience, and reputation for deals help to improve buyout exit success, and their industrial experience could mitigate the adverse influence of institutional distance between the target company and the PE firm countries.

The cultural distance between the countries of PE firms and their portfolio companies was found to have no significant impact on cross-border buyout performance.

In the study’s additional analyses examining the choice of exit routes, it found that PE experience, PE club size, and initial buyout value are positively associated with the likelihood of going IPO. As the most frequently used exit strategy, M&A is more likely to be adopted when the institutional environment quality is higher and when PE firms learn more from their past activities.

To the authors’ knowledge, no previous study has focused on country-specific factors that may affect a PE cross-border buyout’s eventual exit success. This paper is an attempt to fill this gap by examining the determinants of cross-border buyout performance with a focus on the differences in institutional quality across countries and the role of PE firm’s experience in these markets.

This study offers important insights into the determinants of buyout success in both developed and developing countries.

The working paper is available for download at the link below.