Finance Seminar

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.