Private Equity and the Resolution of Financial Distress

Private Equity and the Resolution of Financial Distress

Edie Hotchkiss, David Smith, Per Strömberg

Series number :

Serial Number: 
331/2012

Date posted :

March 01 2012

Last revised :

October 25 2020
SSRN Share

Keywords

  • financial distress • 
  • Bankruptcy • 
  • private equity • 
  • capital structure

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.

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Authors

Real name:
Edie Hotchkiss
Dr.
Real name:
David Smith
RiskMetrics Group