Leveraged Buy-Out Funds

Pursuant to a congressional request, GAO reviewed the role of private and public pension funds in leveraged buy-outs (LBO), focusing on the: (1) methods pension plans used to evaluate LBO-funded investments; (2) principal provisions of LBO-fund limited-partnership agreements; (3) rate of return pension plans obtained on LBO-fund investments; and (4) Department of Labor's oversight of pension plan investments in LBO funds.

GAO found that: (1) the 8 public and private pension plan sponsors reviewed invested about $3.7 billion in 53 LBO funds, ranging from 0.4 to 8.4 percent of their assets; (2) plan sponsors evaluated investments based on the experience of the general partner, since they generally did not know the acquisition target or price; (3) the heavy leveraging associated with LBO increased their vulnerability to an economic turndown or a rise in interest rates; (4) 2 of the 6 partnership agreements limited the amount of capital for acquisitions to 10 or 25 percent of the total capital commitments and indicated that they would use the capital to make between 5 and 20 acquisitions, 4 did not specify the number of acquisitions they would make, and 4 limited their investments to friendly takeovers; (5) although funds did not permit limited partners to unilaterally withdraw from participation, they permitted limited partners to sell or transfer interest in the fund; (6) the annual rate of return that six of the eight sponsors obtained greatly exceeded the return obtained on the total plan investments; and (7) although Labor conducted one investigation concerning allegations that an LBO fund's general partner received a disproportionately large share of the profits, it closed the investigation without finding any violations.