Private equity firms—firms that finance acquisitions of other companies using substantial amounts of debt—are frequently characterized as the vultures of the finance world, swooping in to strip what value they can out of the newly debt-laden companies, then abandoning them to bankruptcy and liquidation.

 

But is such a characterization warranted? According to “Private Equity and the Resolution of Financial Distress,” a study presented at the January 2012 American Finance Association Meeting, the answer is a clear “no.”

 

The study, co-authored by Edith Hotchkiss of the Carroll School of Management at Boston College, David C. Smith of the McIntire School of Commerce at the University of Virginia, and Per Stromberg of the Institute of Financial Research at the Stockholm School of Economics, sought insight into two primary private equity-related questions. First, are private equity-backed firms more likely to declare bankruptcy than other debt-laden firms? Secondly, if bankruptcy is declared, how does the restructuring and recovery process of private-equity backed firms compare with that of non-private equity-backed firms?

 

“There’s a significant body of research, going back to the 1980s, on the various benefits of private equity ownership,” says Smith. “We wanted to see if there was a downside to having so much debt; we were curious to know what happens to private equity-backed companies when they hit a bump in the road—when they become unable to meet their financial obligations.”

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