Private Equity, Buy-Outs and Insolvency Risk

72 Pages Posted: 24 Jun 2011

See all articles by Nick Wilson

Nick Wilson

University of Leeds - Credit Management Research Centre; Leeds University Business School; University of Leeds - Faculty of Business

Mike Wright

Nottingham University Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 24, 2011

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.

Keywords: Private Equity, Management Buyouts, Bankruptcy, Hazard Model

JEL Classification: D21, C25, G24, G32, G33

Suggested Citation

Wilson, Nicholas and Wright, Mike, Private Equity, Buy-Outs and Insolvency Risk (June 24, 2011). Available at SSRN: https://ssrn.com/abstract=1871651 or http://dx.doi.org/10.2139/ssrn.1871651

Nicholas Wilson

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Leeds University Business School ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

Mike Wright (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom
+44 115 951 5257 (Phone)
+44 115 951 5204 (Fax)

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