58 Pages Posted: 21 Mar 2011 Last revised: 14 Mar 2014
Date Written: March 13, 2014
We examine the role private equity (PE) firms play in the resolution of financial distress using a sample of 2,151 firms that borrow in the leveraged loan market between 1997 and 2010. Controlling for leverage, PE-backed firms are no more likely to default than other leveraged loan borrowers. When firms do default, PE-backed firms restructure more often out of court, restructure faster, and are more likely to remain an independent going concern following the restructuring. PE owners are also more likely to retain control of the firm following the restructuring. The propensity for PE owners to infuse capital as firms approach distress is positively related to measures of the success of the restructuring. Overall, our results show that PE sponsors resolve distress in portfolio firms relatively efficiently.
Keywords: Financial Distress, Bankruptcy, Private Equity, Capital Structure
JEL Classification: G24, G33, G32
Suggested Citation: Suggested Citation
Hotchkiss, Edith S. and Strömberg, Per and Smith, David C., Private Equity and the Resolution of Financial Distress (March 13, 2014). AFA 2012 Chicago Meetings Paper; ECGI - Finance Working Paper No. 331/2012. Available at SSRN: https://ssrn.com/abstract=1787446 or http://dx.doi.org/10.2139/ssrn.1787446