Saturday, June 26, 2010

Risks of Combining Banking and Private Equity

INSEAD's Lily Fang and Harvard's Josh Lerner and Victoria Ivashina have a new working paper that examines the impact of combining banking and private equity. According to their paper:

"Between 1983 and 2009, bank-affiliated private equity groups accounted for over a quarter of all private equity investments. Banks' involvement increases during peaks of the private equity cycles. In particular, 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. Investments made by bank-affiliated groups have slightly worse outcomes than non-affiliated investments, despite the targets having superior performance prior to investments. Investments during market peaks by commercial banks have significantly higher rates of bankruptcy."