Private Equity and the Resolution of Financial Distress
61 Pages Posted: 21 Mar 2011 Last revised: 8 Jul 2021
Date Written: July 7, 2021
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.
Keywords: Financial Distress, Bankruptcy, Private Equity, Capital Structure, Leveraged Loans, Covid-19
JEL Classification: G24, G33, G32
Suggested Citation: Suggested Citation