Private Equity and the Resolution of Financial Distress
David Smith, The McIntire Center for Financial Innovation
23rd Oct 2012 11:15 am - Room 214/215 Economics and Business Building
We explore the financial distress costs of private equity-backed firms by examining the default likelihood and restructuring behavior of 2,156 firms that obtained leveraged loan financing between 1997 and 2010. We show that PE-backed firms are no more likely to default during this period than other firms with similar leverage characteristics. When private equity-backed firms do become financially distressed, they are more likely to restructure out of court, take less time to complete a restructuring, and are more likely to survive as an independent going concern, compared to financially distressed peers that are not backed by a private equity investor. Private equity investors also frequently remain in control of their firm following the restructuring, an occurrence that is rare among non private equity owners. Private equity investors appear not to exacerbate the likelihood of financial distress and, when a default occurs, resolve the distress fairly efficiently.