The Risk Appetite of Private Equity Sponsors 1 Reiner Braun Center for Entrepreneurial and Financial Studies, Technische Universität München, Arcisstrasse 21, 80333 Munich, Germany, Nico Engel Center for Entrepreneurial and Financial Studies, Technische Universität München, Arcisstrasse 21, 80333 Munich, Germany, email: nico.engel@wi.tum.de. Peter Hieber HVB Institute for Mathematical Finance, Technische Universität München, Parkring 11, 85748 Garching-Hochbrück, Germany, email: hieber@tum.de, Rudi Zagst HVB Institute for Mathematical Finance, Technische Universität München, Parkring 11, 85748 Garching-Hochbrück, Germany, email: zagst@tum.de. Abstract Using a unique proprietary data set of 460 realized buyouts completed between 1990 and 2005, we examine the risk appetite of private equity (PE) sponsors in different states of the PE market and analyse key determinants of deal-level equity risk. We develop a new approach to mathematically model PE investment equity risk based on the Black-Cox default model. We find higher equity volatilities during boom periods. Further, deals conducted by more reputed PE sponsors have lower equity volatilities as they are unwilling to imperil their reputation by taking excessive risks. In addition, we find that PE sponsors’ risk appetite is negatively related to the ownership stake in the buyout target company. Keywords: Risk Appetite, Equity Volatility, Private Equity. JEL Classification code: G24, G30, G32, G34 1 This version may differ from the final published version The Risk Appetite of Private Equity Sponsors, Journal of Empirical Finance, Vol. 18 (2011), pp. 815–832 in typographical detail. 1