Sources of Value Creation in Private Equity Buyouts of Private Firms

Abstract Despite the prevalence of private equity (PE) buyouts firms, little is known about how these transactions create value. We provide evidence that PE acquirers disproportionately target firms with weak operating profitability and those have growth potential but are highly levered dependent on external financing. Target grow rapidly post-buyout, especially undertaking add-on acquisitions, increases for both profitable unprofitable targets. Our suggests value by relaxing financing constraints strong investment opportunities improving performance while financial engineering plays a limited role.