Do Private Equity-Backed Buyouts Respond Better to Financial Distress than PLCs?

Abstract

The paper uses a new, hand-collected dataset of 93 private equity backed buyouts and 96 PLCs that became financially distressed over the period 1995–2008 to investigate empirically whether private equity owned companies (buyouts) in financial distress (Receivership/Administration) have better recovery rates for secured debt than their publicly owned (PLC) counterparts and, if so, why. We find that the recovery rates of buyouts (amount recovered in proportion to secured debt outstanding) are in fact about twice that of PLCs during this period. Administration, surprisingly, has no effect on debt recovery rates but seems significantly to reduce the time to recovery. A larger number of creditors which in theory should reduce recovery rates, again has no impact, nor does company size. Intriguingly, however, higher leverage consistently reduces the recovery rate as (we hypothesise) more leveraged buyouts need to have recourse to lower quality assets for security. Finally, the time in recovery is negatively related to the date of distress onset (later years have shorter durations) and to the size of the firm (a concave relationship).