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IESE Research Papers,
IESE Business School

No D/682: Measuring idiosyncratic risks in leveraged buyout transactions

Alexander P. Groh (), Rainer Baule and Oliver Gottschalg
Additional contact information
Alexander P. Groh: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Rainer Baule: University of Goettingen
Oliver Gottschalg: HEC School of Management

Abstract: We use a CCA model to calculate implied idiosyncratic risks of LBO transactions. A decisive model feature is the consideration of amortization. From the model, the asset value volatility and the equity value volatility can be derived via a numerical procedure. For a sample of 40 LBO transactions we determine the necessary model parameters and calculate the transactions' implied idiosyncratic risks. We discuss the expected model sensitivities and verify them by variation of the input parameters. With the knowledge of the returns to the equity investors of the LBOs we are able to calculate Sharpe Ratios on individual transaction levels for the first time, thereby fully incorporating the superimposed leverage risks.

Keywords: Idiosyncratic Risk; Private Equity; Benchmarking

JEL-codes: G13; G24; G32

19 pages, March 15, 2007

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