LBO and VC Investments in Recent Crises

Abstract

This article describes the impact of economic and financial crises on the investment behavior and cash flow allocation of leveraged buyout (LBO) and venture capital (VC) funds. It complements prior research on the performance of private equity investments throughout the financial crisis. The authors base their empirical analysis on 10,073 LBO and VC deals from 1999 until 2018, provided by Thomson Reuters Eikon, and analyze the resilience of investments in various industries regarding volatility, maximum drawdowns, and investment returns. The empirical results show that LBO and VC funds withdrew their capital from the most volatile industry sectors during both the dot-com crisis (2000–2002) and the financial crisis (2007–2008). The data analysis confirms that these funds reduced their overall exposure to the markets during crises by holding back capital and allocating their money to less- volatile and more-crisis-resilient industries, such as energy and power. These findings extend crisis-related research by explaining how LBO and VC funds’ dynamic investment behavior during crises can positively affect investment performance.

TOPICS: Private equity, financial crises and financial market history, performance measurement

Key Findings

• ▪ The article shows that fund managers in LBO and VC funds allocate their investors’ capital into counter-cyclical and crisis-proof sectors and withdraw money from volatile sectors during an economic crisis.

• ▪ The findings demonstrate that this active change in the fund managers’ investment behavior during the crises may explain why LBO and VC funds can outperform comparable public equity indices.

• ▪ The article further shows that the allocation of capital in LBO and VC funds during crises is comparable to investors’ allocation behavior in the public equity markets, which is especially important considering the outperformance of PE and VC funds over public equity measured by the public market equivalent.