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(originally published by Booz & Company)


Weighing the Performance of Private Equity Firms

Critically, firms in the PE group were also more likely to remain independent after the financial distress was resolved — 11 percent of PE-backed firms were sold off, whereas 16 percent of non-PE cases ended in liquidation. The authors attribute the PE group’s superior survival rate to PE investors’ professionalism, deep pockets, and access to outside capital, as well as the need to maintain their reputation in the industry.

Moreover, the authors add, the findings suggest that the discipline that PE firms bring to bear in running highly leveraged firms could lead to higher operating efficiency and actually decrease the odds of financial distress. And when company values do decline, PE owners have strong incentives to act fast and correct each minor blip, preserving their equity stake by committing capital to support (and perhaps help save) the distressed company.

Bottom Line:
Everything else being equal, PE-owned firms default at the same rate as highly leveraged companies not backed by private equity. When defaults occur, PE-owned firms are likely to emerge from the bankruptcy and reorganization process faster than non-PE-owned companies and are also more likely to remain independent.

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