Wednesday, January 19, 2011

FANG Lily Hua, IVASHINA Victoria, LERNER Josh
Unstable Equity? Combining Banking with Private Equity Investing
INSEAD Working Paper 2011/04/FIN

Between 1983 and 2009, bank-affiliated private equity groups accounted for over 25% of all private equity investments. In this paper we show that deals done by bank-affiliated private equity groups were financed at significantly better terms than other deals when the parent bank was part of the lending syndicate. The superior terms almost entirely concentrated in market peaks. Furthermore, between 2001 and 2008, the financing terms for affiliated private-equity transactions respond to fluctuations in the flow of funds for collateralized loan obligations. Targets of deals in which the parent bank was part of the lending syndicate exhibited worse ex-ante characteristics, and bank-affiliated investments had slightly worse outcomes than non-affiliated investments. While banks' involvement in the private equity market was highly pro-cyclical, their capital commitment to funding these transactions was counter cyclical. Collectively, this evidence is consistent with credit market-timing by bank-affiliated firms and consistent with theory and concerns of unstable risk-taking by banks.