The Opportunity Cost of Capital of US Buyouts

This paper measures the risk-adjusted performance of US buyouts. It draws on a unique and proprietary set of data on 133 US buyouts between 1984 and 2004. For each of them we determine a public market equivalent that matches it with respect to its timing and its systematic risk. After a correction for selection bias in our data, the regression of the buyout internal rates of return on the internal rates of return of the mimicking portfolio yields a positive and statistically significant alpha. Our sensitivity analyses highlight the necessity of a comprehensive risk-adjustment that considers both operating risk and leverage risk for an accurate assessment of buyout performance. This finding is particularly important as existing literature on that topic tends to rely on performance measures without a proper risk-adjustment.