Private Equity and the Resolution of Financial Distress

61 Pages Posted: 21 Mar 2011 Last revised: 8 Jul 2021

See all articles by Edith S. Hotchkiss

Edith S. Hotchkiss

Boston College - Carroll School of Management

Per Strömberg

Swedish House of Finance; ECGI; CEPR

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: July 7, 2021

Abstract

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

Hotchkiss, Edith S. and Stromberg, Per and Smith, David Carl, Private Equity and the Resolution of Financial Distress (July 7, 2021). 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

Edith S. Hotchkiss

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Per Stromberg (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://www.hhs.se/en/houseoffinance/about/people/people-container/per-stromberg/

David Carl Smith

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3,228
Abstract Views
17,713
rank
4,322
PlumX Metrics