Private Equity, Buy-Outs and Insolvency Risk

Abstract

Private Equity restructuring of companies using debt finance has been criticised for increasing financial distress and bankruptcy in the corporate sector and this was especially so in the aftermath of the financial crisis. We build a unique data set comprising the population of over eight million company year observations and 153,000 instances of insolvency covering the period 1995-2010 and encompassing the recessionary cycle. We examine the whole spectrum of buyout ownership types (pre and post buyout) in comparison with the private and public corporate population and over time. We provide direct evidence relating to whether buyouts and buy-ins, private equity backed or not, are more or less likely to fail in terms of entering formal insolvency proceedings than other firms and how this varies over the economic cycle. Controlling for size, age, sector and macro-economic conditions (base hazard) we find that private-equity backed buyouts are no more prone to insolvency than the non-buyout population and pre-buyout credit risk. Conditioning on company performance and operational characteristics we show that PE-backed companies do not carry more insolvency risk than other (distressed) companies and other buyout types. We find that leverage does not distinguish buyouts that fail from those that survive.