Operating Performance, Valuation, Leverage, and Corporate Governance of Leveraged Buy-Out Transactions : A Continental European Perspective

This article aims to analyse the evolution over the recent years of LBO funds, in terms of valuation (asset prices) and the role that leverage and corporate governance played in its evolution.Leverage is one of the positive factors that is supposed to contribute to the success of private equity, among other things through its positive impact on corporate governance. However, private equity has also other tools and means that can contribute to value creation and thus the model's success. Using a data panel composed of Continental European transactions between 1997 and 2010, the strong presumption that the abuse of the leverage effect has contributed to corrupt the fundamentals of the model and also contributed significantly to rising asset prices offered by LBO funds over the last years is verified. In addition to leverage, the booming M&A market, along with an increasing trend of private equity to pursue build-up strategies also contributed to such asset price inflation.The conclusion is that LBO, as an investment model, seems to behave along the classical patterns over the medium terms, the recent phenomenon being linked to cyclical effects that may have caused LBO funds to forget about the underlying rational understanding of previously successful model. This may not cause a structural problem as long as LBO funds are capable of switching back to the fundamentals driving their initial success