Private Equity Owners Research Articles

Private Equity and the Resolution of Financial Distress

Abstract We examine the role private equity (PE) sponsors play in the resolution of financial distress of portfolio companies. PE-backed firms have higher leverage and default at higher rates than other companies borrowing in leveraged loan markets. But, PE-backed firms restructure more quickly, avoid bankruptcy court more often, and liquidate less often compared to other highly leveraged firms experiencing financial distress. PE owners are also more likely to retain control post-restructuring, often by infusing capital as firms approach distress. While default frequencies are higher among PE-backed firms, PE investors appear to manage financial distress at lower cost compared to other owners. (JEL G23, G32, G33)

What is different about private equity‐backed acquirers?

AbstractThis paper investigates whether private equity (PE)‐backed acquirers have a “parenting advantage” in the mergers & acquisitions (M&A) market. We employ a sample of 788 PE‐backed firms and a carefully matched control group of 6,652 non‐PE‐backed peers, for which we observe the entire acquisition history over a 19‐year time span. Difference‐in‐differences estimates suggest that PE backing induces a sizeable but short‐lived boost to acquisition activity, while the type and complexity of acquisitions are similar to those of non‐PE‐backed peers. These results are consistent with the idea that PE backing enhances execution and speed in the M&A market. We find that portfolio firms benefit from this boost through improved valuations and margins. The extent to which this is true, however, depends on the institutional setting of the PE owner. Our results indicate that add‐on acquisitions are detrimental if PE owners are late buyers or suffer from limited attention problems.

Specialties firm Vertellus is sold again

The specialty chemical maker Vertellus is changing private equity owners again. Pritzker Private Capital is buying the firm for an undisclosed amount. Vertellus will continue to be led by CEO John ...

Arkema to pay $570 million for surfactant maker

France’s Arkema has reached a deal to acquire the Florida-based specialty surfactant maker ArrMaz from Golden Gate Capital, a private equity firm, for $570 million. Arkema says the purchase will help it reach a goal of deriving 80% of sales from specialty chemicals by 2023. ArrMaz, which has annual sales of $290 million, employs 400 people. It formulates fatty acid-, ester-, and sulfonate-based processing aids and additives such as defoamers, and dust-control coatings for the mining, fertilizer, and asphalt industries. The firm operates a total of nine chemical plants in the US, Brazil, Morocco, Saudi Arabia, and China. Around for more than 50 years, ArrMaz started out by providing processing aids to the Florida phosphate fertilizer industry. It has had a series of private equity owners throughout the years. Wind Point Partners acquired ArrMaz in 2003 and combined it with Custom Chemicals, creating a supplier of process chemicals for fertilizer

Founder retention as CEO at IPO in emerging economies: The role of private equity owners and national institutions

We integrate the institutional perspective with research on the governance role of private equity firms in an investigation of Founder-CEO successions in Initial Public Offerings (IPOs) in emerging markets. Using a unique, hand-collected and comprehensive sample of 191 firms having undertaken IPOs in 21 markets across the African continent between January 2000 and August 2016, we apply instrumental variable (IV) Probit methodology and find that higher levels of private equity ownership are positively associated with the probability of the founder's retention as CEO, especially in the context of low-quality formal institutions. Further, in societies with high tribalism, higher private equity ownership is associated with an increased likelihood of founder retention. Voids in the institutional architecture underscore the importance of the founder as a key organizational resource for the firm and a source of institutionalized legitimacy, which in turn confers on the firm an ability to access required resources.

Debt-for-Control Investing in Asia: Nine Entertainment Company

In October 2012, Australian media giant Nine Entertainment Company (NEC) was in the midst of a major debt renegotiation that would determine whether the company received a renewed chance to survive and thrive or faced a long and potentially costly insolvency proceeding. Six years earlier, private equity firm CVC Partners (CVC) had taken a controlling position in NEC, culminating by 2008 in one of the largest leveraged buyouts (LBOs) in the Asian market. Now, due to declining revenues in the Australian media markets in which it operated, NEC was in jeopardy of defaulting on its senior secured debt. A large portion of the senior secured debt was owned by Apollo Global Management (Apollo) and Oaktree Capital Management (Oaktree), two large alternative investment funds that specialized in managing—and often taking over—companies in financial distress. Apollo and Oaktree prepared to face off against NEC's CVC owners—as well as holders of NEC mezzanine debt, dominated by a credit arm of Goldman Sachs—in what could culminate in a costly restructuring process and bankruptcy filing. In the middle of the negotiations was David Gyngell, NEC's CEO and son of the famed Nine Network TV broadcaster, Bruce Gyngell. What were his options? Could he facilitate a consensual agreement across the varied investors representing the debt and equity holders in this case? Or would NEC be forced to file for the Australian version of a bankruptcy proceeding?This case is appropriate for graduate or undergraduate students with an introductory background in finance. It enables students to learn from a real-life case about a variety of relevant topics, including the Australian media market, the Asian LBO market, and restructuring options in industrialized economies outside the United States. Excerpt UVA-F-1800 Rev. Dec. 13, 2017 Debt-for-Control Investing in Asia: Nine Entertainment Company Overview It was the morning of October 16, 2012, and David Gyngell, CEO of Nine Entertainment Company (NEC), faced one of the biggest challenges of his business career. NEC and its leading assets, Nine Network Australia (television) and ACP Magazines, were leading institutions in the Australian media landscape. Gyngell had accepted the job of CEO with relish less than a year before. He had been brought in by NEC's private equity owners, CVC Capital Partners (CVC), to help restructure the media empire following the global financial crisis and a decline in advertising revenues. Yet now he had to represent the company in debt negotiations that were pitting some of the largest and most savvy investors in the world against each other, hedge fund Oaktree Capital Management (Oaktree) and private equity firm Apollo Global Management (Apollo) versus the venerable Goldman Sachs. Media reports that morning had described the forthcoming negotiations as “D-day,” with the company “on the brink of collapse” and its future “on tenterhooks.” As Gyngell knew, the media loved talking about the media, especially when it involved the financial distress of one of Australia's leading companies. . . .

What Happens to a Nursing Home Chain When Private Equity Takes Over? A Longitudinal Case Study.

We analyzed what happens to a nursing home chain when private equity takes over, with regard to strategy, financial performance, and resident well-being. We conducted a longitudinal (2000-2012) case study of a large nursing home chain that triangulated qualitative and quantitative data from 5 different data sources. Results show that private equity owners continued and reinforced several strategies that were already put in place before the takeover, including a focus on keeping staffing levels low; the new owners added restructuring, rebranding, and investment strategies such as establishing new companies, where the nursing home chain served as an essential “launch customer.”

The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry

How do private equity firms affect their portfolio companies? We document operational changes in restaurant chain buyouts using comprehensive health inspection records. Store-level operational practices improve after private equity buyout, as restaurants become cleaner, safer, and better maintained. Supporting a causal interpretation, this effect is stronger in chain-owned stores than in franchised locations—“twin” restaurants over which private equity owners have limited control. These changes are particularly apparent when private equity partners have prior industry experience. The results suggest that by bringing in industry expertise, private equity firms improve firm operations. Received October 27, 2014; accepted March 1, 2016 by Editor Francesca Cornelli.

The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry

Do private equity buyouts disrupt company operations to maximize short-term goals? We document significant operational changes in 103 restaurant chain buyouts between 2002 and 2012 using health inspection records for over 50,000 stores in Florida. Store-level operational practices improve after private equity buyout, as restaurants become cleaner, safer, and better maintained. Supporting a causal interpretation, this effect is stronger in chain-owned stores than in franchised locations -- “twin restaurants” over which private equity owners have limited control. Private equity targets also reduce employee headcount, lower menu prices, and experience a lower likelihood of store closures -- a proxy for poor financial performance. These changes to store-level operations require monitoring, training, and better alignment of worker incentives, suggesting PE firms improve management practices throughout the organization.

Corporate Parenthood

Firms use the labels of family relationships, such as parent companies, sister banks and brother-sister controlled groups. This article considers whether there are additional insights underlying such labels that could be portable to the corporate context, using the private equity (P-E) led leveraged buyout (LBO) as the understudy. By emphasizing ‘parenthood’ as an essential feature of the relationship between private equity owners and their portfolio companies, the analysis borrows from the rationales commonly relied upon in family law to balance parental duties and subsidiary rights. Exploring and emphasizing the role of private equity firms as parents motivates a shift in perspective which looks at these firms as inclusive (rather than extractive) institutions with a purpose and responsibility that extends to other members of their corporate families.

Acquisition of UK ports by private equity funds

Private equity (PE) ownership of port regulatory authorities and port land is primarily a feature in the UK. Most other countries retain public port authorities who lease/concession port land and operations to private terminal operators rather than selling it off, as has occurred in the UK. Motivations behind PE ownership of ports in the UK include gaining access to high profits, significant barriers to entry, and low risk. Case studies reveal that PE port owners focus on high profitability, albeit with limited potential for investment in creating new port assets because port surpluses are required to pay the interest on debt resulting from leveraged acquisitions. The PE exit strategy is to sell-on port assets, often to other PE owners, implying that ports concerned may continually carry a high debt burden, yet will have few new assets to show for it. This perennial debt burden is not connected with the creation of new port assets which might be expected to benefit port users and the wider economy. Thus, it is doubtful if the PE model of port ownership, operation and regulation is conducive to creating a competitive national economy. Indeed, the opposite outcome is more likely.

Do private equity owners increase risk of financial distress and bankruptcy?

In this study, we investigate financial distress risks of European companies around the buyout event in the period between 2000 and 2008. In addition, we analyze whether buyout companies go bankrupt more often than comparable non-buyout companies. Our results suggest that private equity investors select companies which are less financially distressed than comparable non-buyout companies and that the distress risk increases after the buyout. Despite this increase, private equity-backed companies do not suffer from higher bankruptcy rates than comparable non-buyout companies. In fact, when companies are backed by experienced private equity funds, their bankruptcy rates are even lower. These findings indicate that experienced investors are better able to manage distress risks than their inexperienced counterparts.

Short-Term Expectations in Listed Firms: The Mitigating Impact of Private Equity Owners

We report empirical evidence regarding the disciplining role of different institutional and other owners in reducing managerial myopia. Using data from a large Nordic survey, we find that companies to a reasonably high degree feel that external pressure for a good result in the short-term generates conflict with the company’s long-term goals. We test for the effect of several ownership types, and find that especially a large private equity owner is able to significantly reduce perceived pressure for short-term actions. We also find support for a behavioral characteristic: younger managers feel significantly more pressure. Firms subject to higher pressure undertake more actions to accommodate that pressure. Again, the impact of especially a large private equity owner is beneficial because such firms undertake significantly less often actions that are likely to destroy value, such as deprioritizing their long-term investments or R&D.

Private Equity and the Resolution of Financial Distress

We examine the role of private equity (PE) sponsors in the resolution of financial distress of portfolio companies. PE-backed firms have higher leverage and default at higher rates than other companies borrowing in leverage loan markets. However, conditional on contemporaneous leverage, default rates are not significantly higher. Among leveraged borrowers that experience a default, we find that PE-backed firms restructure more quickly and more often out of court, and are less likely to be liquidated. PE owners are more likely to retain control post-restructuring than other pre-default owners, often by infusing capital as firms approach distress. Our results suggest that while PE investors contribute to more defaults due to the high leverage they put on companies, this cost is reduced by the ability of PE investors to manage financial distress compared to other owners.

Do Private Equity Owners Increase Risk of Financial Distress and Bankruptcy?

There is some controversy on the key sources of success in the private equity model and on how this business model affects the portfolio companies. We investigate financial distress risks of European companies around the buyout event in the period between 2000 and 2008. In addition, we analyze whether buyout companies go bankrupt more often than comparable non-buyout companies. Our paper suggests that private equity investors select companies which are less financially distressed than comparable companies and that the distress risk increases after the buyout. Despite this increase, private equity-backed companies do not suffer from higher bankruptcy rates than non-buyout companies. In fact, when companies are backed by experienced private equity funds, their bankruptcy rates are even lower. Experienced investors seem to be better able to manage distress risks than their inexperienced counterparts.

Public to Private Transactions, Private Equity Ownership and IPOs: A Case Study of Debenhams

This paper reviews the case of Debenhams (UK retailer) since it was taken private in 2003 by private equity funds, through its private equity ownership period, its IPO in 2006 and its subsequent underperformance. We investigate the period preceding the public to private, the valuation at this time, the deal structure and its funding – in particular the high amount of debt the company has been left with after its private equity ownership period. We also review the actions of its private equity owners to extract value and realise abnormal returns in a short period of time and the impact of such actions for Debenhams and its shareholders post-IPO. We look at the IPO and the subsequent underperformance of the Debenhams stock and the actions taken by management to address the issues of a highly leveraged company and reduce net debt. We find that Debenhams has been financially weakened by its private equity ownership period, especially through sale of freehold property (resulting in higher rent payments), high debt (creating a higher interest burden) and reduced capital expenditures (which will need to be compensated later). We also identify that Debenhams’ board had to cut dividends and propose a scrip dividend scheme in order to reduce its cash outflows and hence improve its net debt position. It also had to improve its working capital cycle by lengthening its suppliers’ payment terms.The state of Debenhams’ balance sheet after the private equity ownership period, significantly impacted by both the absence of its freehold properties and massive net debt, reduced the options available to the shareholders as these elements weighted negatively on shareholders’ returns and made a new takeover highly improbable.In the coming years, many other companies could be affected by similar issues as a vast amount of debt will be required to refinance the excesses of the past LBOs.

Private Equity in Australia

Private equity investment in Australia has changed in both extent and nature over the last few years. In particular, transactions where a private equity fund buys out a mature publicly listed company have increased. The targeting of ‘iconic’ companies such as Qantas by private equity heightened the concerns held in some quarters of the possible impact of private equity ownership on corporate stability and employment conditions in these companies. This article provides an overview of private equity transactions in Australia. It also reviews the major concerns with the private equity business model, which were presented by various parties to a senate enquiry in 2007. It argues that a window of opportunity was open during 2006 and 2007 for private equity owners to extract returns on their investment by reducing employment costs using the Work Choices legislation. That such an approach was not pursued suggests that private equity funds realize returns through a number of avenues, not just by reducing running costs or rationalizing productive assets.

SWEDEN’S PERSTORP SPRINGS AHEAD

THE MANAGERS OF PERSTORP have been given a mission by the firm’s private equity owners: grow, and grow quickly, in a few chosen segments in the global specialty chemicals industry. And that is precisely what is happening. The Swedish company has embarked on a flurry of acquisitions to beef up a business portfolio that has polyol chemistry at its core. The firm’s latest deal, announced in mid-March, is also its biggest: intertwined agreements to take over Rhodia’s line of aliphatic isocyanates and LyondellBasell’s business in aromatic isocyanates. Aliphatic and aromatic isocyanates are reacted with polyols to produce industrial paint ingredients and flexible foams, respectively. The purchase includes plants in France and Texas and will add $460 million to Perstorp’s 2007 sales of about $1.27 billion. In February, Perstorp wrapped up its purchase of Solvay’s caprolactones business for nearly $310 million. The acquisition covered a plant in Warrington, England, a business with 2006 sales of about ...

Private Equity and the Culture of Value Extraction

Private Equity and the Culture of Value Extraction

Private equity owners weigh up merger of Vinnolit and Vestolit

Private equity owners weigh up merger of Vinnolit and Vestolit