Private equity cuts the toll of failure in buyouts

Private Equity and Insolvency compares the failure rates of 140,000 private equity-backed and non-private equity backed businesses in the UK between 1995 and 2009.

The results show that buyouts are more prone to failure than other types of companies, but that the risk of failure is significantly reduced if private equity companies are involved.

The research, commissioned by the British Private Equity and Venture Capital Association, was carried out by the Credit Management Research Centre at Leeds University Business School, the Centre for Management Buyout Research at Nottingham University Business School, and The Entrepreneurship and Innovation Centre at Birmingham University Business School.

Nick Wilson, professor of credit management at Leeds University Business School, said: "This study analysed the insolvency rates of the UK corporate sector up to and including the recession and the peak of corporate insolvencies.

"We find that private equity-backed buyouts do not have a higher failure rate than other companies and, indeed, show a lower incidence of financial distress than other types of company buyouts. Although leveraged, private equity-backed buyouts generate sufficient cash to cover interest payments and show adequate coverage ratios."

He added: "Moreover, there is evidence that stakeholders in private equity-backed deals are proactive in helping their portfolio companies deal better with trading and/or financing difficulties, particularly in the more recent period leading up to the credit crunch."

Professor Mike Wright, of Nottingham University Business School, said: "These are important findings in the context of the current policy debates surrounding private equity ownership. Our finding on the impact of leverage is counter to popular perceptions about private equity ownership.

"Private equity firms seem to select the best opportunities from the buyout population in terms of the company's prospective profitability and ability to cover interest."