Mergers and Acquisitions with Private Equity Intermediation

Abstract

We build a search model of mergers and acquisitions (M&A) with private equity (PE) intermediation. The model comprises three concurrently operating markets: corporate-corporate, corporate-PE, and inter-PE secondary buyout (SBO). PE intermediaries search for investment opportunities, hold an inventory of firms, add operational value through better governance, and exit by selling their entire portfolio. PE funds can enhance M&A market efficiency by alleviating search frictions and providing greater liquidity through SBOs, resulting in complementarities among PE funds. A calibration result shows PE funds' values are higher by 26% due to SBOs and increasing in the number of funds.