Buyout Funds and Stocks Show ‘Almost Perfect Co-Movement’

While the public markets are more volatile, they tend to perform similarly to leveraged buyouts.

Illustration by II

Illustration by II

The correlation between public equity assets and leveraged buyout investments is stronger than previously thought, according to new data from eFront.

The alternative data provider said in a report published Tuesday that while public market investments are more volatile than buyouts, their performance is similar, particularly in bull markets.

“The quarterly movements of multiples of US LBO funds and major U.S. stock indices appear to be significantly positively correlated, and this observation is further amplified during the bullish market periods immediately before the markets contracted,” said eFront CEO Tarek Chouman in a statement.

According to eFront, the standard deviation, which is used to measure volatility, of the S&P 500 between 1992 and 2018 was three times larger than that of leveraged buyout investments during the same time period, or 0.0762 compared to 0.0254.

The firm said this is likely because fund stakes are not immediately tradable, requiring time to sell on the secondary market. Net asset value of these private equity funds is also estimated conservatively by owners on a quarterly basis.

“They only progressively and partially mark their assets to market,” according to eFront.

In other words, because leveraged buyout investments take time to sell and are valued less regularly than public equity investments, they are less volatile.

[II Deep Dive: LBOs Make (More) Companies Go Bankrupt, Research Shows]

Despite this difference in volatility, eFront found that investments in leveraged buyout funds and in the S&P 500 are more correlated than they thought initially. The correlation between the multiples of the two was 0.639 between 1992 and 2018, research from eFront showed. The firm used the total value paid in multiple to measure leveraged buyout performance.

That correlation increased over time. Between 1992 and 2001, the correlation was 0.552, while between 2012 and 2018, it was 0.667, according to the report.

The link was also stronger during bull markets. The ten months ahead of the 2001 market drop saw a correlation of 0.787, while between 2006 and 2008, ahead of the Great Recession, correlation hit 0.909, the report showed.

“These numbers indicate almost perfect co-movement between these markets,” according to eFront’s report.