Unstable equity?
Subtitle: combining banking with private equity investing
By: Lily Fang, Victoria Ivashina, Josh Lerner
Contributors: Ivashina, Victoria; Lerner, Joshua; Harvard Business School
Edition: Rev.
Series: Working paper / Harvard Business School -- 10-106; Working paper (Harvard Business School) -- 10-106.
Publisher: Harvard Business School
Published: 2010
Place of publication: [Boston]
Language: eng
Number of pages: 48
Description: Theoretical work suggests that banks can be driven by market mispricing to undertake activity in a highly cyclical manner, accelerating activity during periods when securities can be readily sold to other parties. While financial economists have largely focused on bank lending, banks are active in a variety of arenas, with proprietary trading and investing being particularly controversial. We focus on the role of banks in the private equity market. We show that bank-affiliated private equity groups accounted for a significant share of the private equity activity and the bank's own capital. We find that banks' share of activity increases sharply during peaks of private equity cycles. Deals done by bank-affiliated groups are financed at significantly better terms than other deals when the parent bank is part of the lending syndicate, especially during market peaks. While bank-affiliated investments generally involve targets with better ex-ante characteristics, bank-affiliated investments have slightly worse outcomes than non-affiliated investments. Also consistent with theory, the cyclicality of banks' engagement in private equity and favorable financing terms are negatively correlated with the amount of capital that banks commit to funding of any particular transaction.
Notes: "June 2010, revised August 2010"--Publisher's website.

"First draft: April 14, 2010, this draft: July 31. 2010"--added t.p.

Previously published as: "An unfair advantage"? : combining banking with private equity investing.

Includes bibliographical references.