The Global Economic Impact of Private Equity Report 2008 - World ...

transactions. This leaves us with a total sample of 21,397leveraged buyout transactions over the period 1 January1970 to 30 June 2007, involving 19,500 distinct firms.In order to track the ultimate fate of these transactions,we first match this sample with the Capital IQ acquisitiondatabase to obtain any subsequent M&A transactionsthat our LBO firms have been involved in. This givesus information which is used to infer trade-sale exits,divestments and add-on acquisitions. We then matchour sample firms with the SDC, Capital IQ and the Caoand Lerner (2006) IPO databases to track down priorand subsequent initial public offerings. Finally, weconduct extensive web searches on a firm-by-firmbasis to infer the ultimate outcomes of these transactions.B. Sample selection issuesAlthough we believe we have constructed the mostcomprehensive database of LBO transactions to date, wewill still only have a partial coverage of these transactionsfor a couple of reasons.First, our sampling methodology does not pick up allthe LBO transactions in the Capital IQ database, due tothe nature of the Capital IQ classification methodology.For example, one of the more notable LBOs of the 1980s,Campeau’s acquisition of Federated Department Stores(see Kaplan 1989c) is in the Capital IQ database but notclassified as a leveraged buyout transaction. Also, asubstantial number of the transactions by buyout funds areclassified as “private placements” rather than acquisitions.In most cases, these are not proper LBO transactions,but rather acquisitions of minority stakes or follow-oninvestments and for this reason we do not want to includetransactions classified as private placements in our sample.Still, there are cases where the distinction is not clear andsome of the private placements should probably have beenincluded in the database. To correct these classificationerrors we would have to check each transaction on a caseby-casebasis, which would not be practical given that thereare more than 200,000 M&A and private placementtransactions in Capital IQ.Secondly, even when the Capital IQ classification is correct,there are quite a few judgement calls that have to be made.The distinction between a PIPE and minority transaction anda proper leveraged buyout is not always clear. Similarly, someLBO deals are more akin to venture capital investments.We try to err on the side of not including any non-LBOtransactions, but this means that some real leveraged buyoutswill be excluded as a result. Moreover, we do not include addonacquisitions by LBO firms as separate LBO transactions,although again the distinction is not necessarily all that clear.Thirdly, Capital IQ started their data service in 1999 andtheir coverage has increased over time. Although Capital IQhas been back-filling its data using various sources, theircoverage is likely to be incomplete for the earlier part of thesample. To gauge the extent of this attrition, we compareour sample with that used in academic studies on UStransactions in the 1980s. In particular, we compare oursample with Lehn and Poulsen’s (1989) sample of goingprivatetransactions from 1980 to 1987, Kaplan’s (1991)sample of LBOs above $100 million in transaction valuefrom 1979 to 1986, Long and Ravenscraft’s (1993) sampleof LBOs of independent firms from 1981to 1987 (i.e.excluding divisional buyouts) and Cotter and Peck’s (2001)comprehensive sample of buyouts between 1984 and 1989.We summarize the results from this analysis in Table 1.Overall, the attrition rate seems significant. The worstcomparative coverage seems to be with respect to Lehnand Poulsen (1989), where the number of public-to-privatetransactions in our data is only 16% of the number identified intheir paper. In comparison, looking at Long and Ravenscraft’s(1993) sample of LBOs of independent companies during thesame period, the coverage is substantially higher, i.e. 41%.This seems to indicate that some of the public-to-privatetransactions of Lehn and Poulsen, most likely the smaller ones,have been (mis)classified as private-to-private transactions inCapital IQ. Moreover, coverage improves significantly towardsthe end of the 1980s. For the 1984–1989 period, our samplesize includes as much as 70% of the number of observationsin Cotter and Peck (2001), compared with 41% for the1981–1987 sample of Long and Ravenscraft (1993). Finally,the largest source of attrition in Capital IQ is among “puremanagement buyouts”, i.e. LBO transactions that are notsponsored by a buyout fund or another financial institution.Looking only at large LBOs with a financial sponsor duringthe 1979–1986 period, we pick up 62 transactions, comparedwith Kaplan’s (1991) sample of 74 transactions, i.e. a coverageof 84%.In our efforts to evaluate attrition rates outside the US, weare limited by the scarcity of international studies on leveragedbuyouts. Wright et al (2006) report statistics on UK and WesternEuropean buyout transactions collected by the Centre forManagement Buyout Research at Nottingham UniversityBusiness School, which allows some suggestive comparisons,also reported in Table 1. According to this paper, there were167 buyouts in the UK and Continental Europe in 1986, whileour Capital IQ sample only includes 28, i.e. 17% of the samplesize. Even for the later sample period, Capital IQ only seems tocover 30–40% of UK buyouts, while the Capital IQ coverage ofWestern European deals is more than four times larger for theperiod 2001–2005. Since Wright et al do not explicitly state theirinclusion criteria, it is hard to identify the sources of thesediscrepancies. Still, it seems plausible that our sample mayunder-report smaller UK buyout transactions, but thatinternational coverage is improving over time.To summarize, in interpreting the results of the analysis belowwe have to be aware of a few sample selection biases. Giventhat coverage is improving over time, we are understatingthe number of transactions that occurred in the 1970s and1980s, while the coverage from the mid-1990s onwardsLarge-sample studies: DemographyThe Global Economic Impact of Private Equity Report 2008