Financial restructuring and recovery in private equity buyouts: the UK evidence

Abstract

A large literature has adumbrated the value-added role of private equity (PE) firms in backing buyouts. The present paper examines a different and hitherto unexplored issue: the role of financial restructuring in PE buyouts in the UK both before and after the financial crash of 2007. The UK evidence indicates that while PE buyouts had greater financial risk than comparable public limited companies (PLCs), they (1) already contained provisions to optimize recovery rates under insolvency, raising their recovery rates significantly relative to controls; and (2) rapidly adjusted the capital structures of new deals in response to the changes in financial and economic climate from 2007 onward resulting in failure rates somewhat lower than PLCs and non-PE buyouts. Non-PE management buyins (MBIs) by contrast have much higher failure rates than any other category throughout the 12-year period. Our analysis offers important implications for policymakers. First, it shows that there has been greater adjustment over time in the leverage and cash position of buyouts than for other private companies and matched PLCs. Second, policymakers need to recognize that while PE buyouts are highly leveraged, non-PE-backed buyouts are more or less well managed. Third, ceteris paribus, PE-backed deals are not riskier than the population of non-buyouts; active involvement by PE firms in helping portfolio companies deal with trading difficulties plays an important role. Fourth, the governance mechanisms in PE buyouts result in greater preservation of value when a portfolio firm enters formal bankruptcy than is the case for PLCs.