Mike Wright

Debunking private equity's debt 'problem'

November 27, 2012: 1:00 PM ET

Study argues that debt doesn't destroy private equity-backed companies.

FORTUNE -- Private equity has a reputation for bankrupting companies, by using copious amounts of debt to finance the original acquisition. A new study, however, finds that private equity ownership is no more likely to result in failure than is non-private equity ownership. Moreover, when a PE-backed company does fail, the debt is not usually to blame.

Well, at least in the UK.

The research was conducted by British academics Mike Wright (Imperial College) and Nick Wilson (University of Leeds), and was not funded by private equity industry groups. It examined around 153,000 bankruptcies for UK-based companies between 1995 and 2010, around 5.3% of were private equity-backed.

Once controlling for size, sage, sector and macro-economic conditions, Wright and Wilson found that "private equity-backed buyouts are no more prone to insolvency than non-buyouts."

More importantly, they examined the PE failures and found that the coefficient didn't change when controlling for leverage. In other words, debt loads were not the failed companies' primary problem. Moreover, Wright and Wilson found that PE-backed companies "are in a better position, because of active ownership and governance, to adjust capital structure over the economic cycle and, therefore, manage insolvency risk and protect assets."

Fortune was able to view a draft version of the paper, which will be publicly released shortly.

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