Andreas Hammer, Alexander Lahmann, Magnus Pflücke

• Politicians and the public blame private equity (PE) firms to receive disproportionately high tax benefits due to the tax-deductibility of interest. In this paper we analyze the contribution of these tax shields to PE performance. Based on a simple model we identify two important drivers of the performance impact: the debt levels of past, current and future owners of the portfolio firm and the negotiation power of buyer and seller at the entry and the exit transaction. Differentiating between financial and strategic iestors with respect to their target debt levels and combining with entry and exit transaction, we define four different cases to be analyzed. Our results point towards a moderate impact of the tax benefits on performance. Only in one out of four cases we find evidence for a significant positive contribution. The reason for this moderate effect is that a significant part of the realized tax savings is already contained in the PE firm´s entrance price and thus paid upfront to the vendors of the portfolio firms. Based on a large sample of more than 4000 deal cycles we find the positive performance case to account for roughly one third of all cases.