Debt and Leverage in Private Equity: A Survey of Existing Results and New Findings

Monday January 4, 2021


This paper examines leverage and debt financing in the private equity buyout market. We provide an overview of how debt is utilized in buyout investment structures and a review of existing theoretical and empirical academic literature. The analysis also includes results from new data sources with information on deal structure and performance since the global financial crisis (GFC). We document that leverage ratios (Net Debt / EBITDA) have increased substantially in recent years and the increase is even more pronounced after unwinding EBITDA “adjustments” which have become increasingly large. Despite the increase in leverage ratios post-GFC, debt as a percentage of total enterprise value (D/V) declined in the 2010s relative to prior decades. These opposing trends are indicative of buyout deals with higher valuations and more focused on growth (which we also document). Related to this, a main conclusion of our analysis is that leverage ratios and D/V measure different aspects of capital structure. In addition, there is a riskreturn trade-off related to debt evident in the data. Specifically, deals with high D/V ratios tend to have above average returns and also higher risk.