Segmentation of the LBO market based on projects' risk and return characteristics

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Several types of equity sponsors are active in the financing of young companies and business transfers. François and Hübner (2013) classify them into three categories - private, diversified and financial sponsors - based on their cost of equity and their cost of debt. This paper aims to study whether those different sponsor types can be related to the segmentation of the LBO market and to differences in LBO deal terms. We perform an empirical study on a sample of 3788 international leveraged buyout deals. We find out that each of the three sponsor types specializes in the business transfer financing of particular types of target companies depending mainly on the companies (projects)’ size and risk. Moreover, the type of sponsor has an influence on the deal’s loan spread. The risk aversion and bargaining power of deal participants also play a role on the type of equity sponsor involved in the deal as well as on the loan spread granted by the lender. Therefore, entrepreneurs and managers should be oriented towards the most suitable type of sponsor given their company’s and own characteristics.

Author(s):

Thomas Bonesire    
HEC Liège - University of Liège
Belgium