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Private Equity and Corporate Bonds

I'm doing some research and find a high correlation between PE investments and Corporate Bonds, any ideas why this may happen? (I'm talking at a macro level)


Thomas White
Title: Managing Director
Company: Retired
(Managing Director, Retired) |

You are not being clear as to what you are specifically finding having a high correlation. I will guess that you found a correlation with companies controlled by private equity having High Yield bonds outstanding. This is because private equity uses leverage to enhance shareholder returns as the Capital Asset Pricing Model illustrates. Private equity never buys a company with 100% equity and always uses debt to finance 50% to 90% (occasionally higher) of the purchase price. This debt is either bank debt, public bonds or a combination of both.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Thomas answered this spot on. Private Equity always finances with an element of debt and in most cases uses the bond market to get financing.


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