Private Equity and Portfolio Companies: Lessons from the Global Financial Crisis

24 Pages Posted: 3 Sep 2020

See all articles by Shai Bernstein

Shai Bernstein

Harvard Business School

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Filippo Mezzanotti

Kellogg School of Management - Department of Finance

Date Written: Summer 2020

Abstract

Critics of private equity have warned that the high leverage often used in PE‐backed companies could contribute to the fragility of the financial system during economic crises. The proliferation of poorly structured transactions during booms could increase the vulnerability of the economy to downturns. The alternative hypothesis is that PE, with its operating capabilities, expertise in financial restructuring, and massive capital raised but not invested (“dry powder”), could increase the resilience of PE‐backed companies. In their study of PE‐backed buyouts in the U.K.—which requires and thereby makes accessible more information about private companies than, say, in the U.S.—the authors report finding that, during the 2008 global financial crisis, PE‐backed companies decreased their overall investments significantly less than comparable, non‐PE firms. Moreover, such PE‐backed firms also experienced greater equity and debt inflows, higher asset growth, and increased market share. These effects were especially notable among smaller, riskier PE‐backed firms with less access to capital, and also for those firms backed by PE firms with more dry powder at the crisis onset. In a survey of the partners and staff of some 750 PE firms, the authors also present compelling evidence that PEs firms play active financial and operating roles in preserving or restoring the profitability and value of their portfolio companies.

Suggested Citation

Bernstein, Shai and Lerner, Josh and Mezzanotti, Filippo, Private Equity and Portfolio Companies: Lessons from the Global Financial Crisis (Summer 2020). Journal of Applied Corporate Finance, Vol. 32, Issue 3, pp. 21-42, 2020, Available at SSRN: https://ssrn.com/abstract=3685963 or http://dx.doi.org/10.1111/jacf.12416

Shai Bernstein (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

Josh Lerner

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Filippo Mezzanotti

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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