Private equity-backed companies demonstrated a strong track record of resilience during periods of economic downturns such as the Global Financial Crises (GFC) or more recently the COVID-19 pandemic. Several factors are likely to have contributed to private equity-backed companies successfully navigating turbulent times. These include the active involvement of private equity (PE) investors, their know-how and experience in turnarounds and greater access to financial resources.
The following section presents recent literature on the performance of PE-backed companies during market dislocations and how they can draw on the resources and business relationships of their PE owners.
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Lavery and Wilson (2023) find that PE–backed companies significantly outperformed their non-PE-backed peers during the COVID pandemic. They show, using a sample of over 1,500 UK PE-backed firms, that PE–owned companies had higher growth in sales, assets, headcount and other key performance indicators compared to their non-PE-backed peers during the 2020/2021 period. According to the authors, PE-backed companies were able to benefit from the expertise of their PE owners and tap into their wide networks of banking relationships, resulting in better access to capital markets and lines of credit.
Bernstein, Lerner and Mezzanotti (2017) studied investments, financing and performance of PE-owned companies and their counterparts headquartered in the United Kingdom during the Global Financial Crisis (GFC). They document that PE-backed companies reduced investments by less than a control group of non-PE-backed peers, and consequently experienced greater equity and debt inflows, higher asset growth and increased market share during the period. They conclude that the results can be attributed to the ability of PE-backed companies to draw on the resources and connections of their PE investors to raise equity and debt financing in challenging market conditions.
Gompers, Kaplan and Mukharlyamov (2020) summarise the findings of the survey of over 200 private equity managers specifically designed to understand the impact of the COVID-19 pandemic on PE investors. They find that during the pandemic investment and operating partners spent the majority of their time supporting portfolio companies, which confirms the view that PE-backed companies can take advantage of the expertise of their financial sponsors during the crises.
Jason (2010) analyses a dataset of more than 3,200 US businesses, which were acquired in a buyout or similar transactions between 2000 and 2009 and were still in the portfolio during 2008-2009, to estimate the default rate of PE-owned companies during the Global Financial Crises (GFC). He finds that PE-backed businesses defaulted at roughly half the rate of comparable businesses, that is 2.8% versus 6.2%.
In a global and one of the most comprehensive studies of private equity leveraged buyouts encompassing over 17,171 PE transactions between 1970 and 2007, Kaplan and Stromberg (2009) report that only 6% of deals from the total sample “ended in bankruptcy and reorganisation”. This translates into an annual default rate of 1.2%, which as mentioned by the authors, is “lower than the average default rate of 1.6% that Moody’s reports for all US corporate bond issuers from 1980-2002". However, the authors sound a note of caution, indicating that not all cases of distress are recorded in publicly available data sources and therefore the number of “bankruptcies” can potentially be higher.
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Bibliography
Lavery, Paul and Wilson, Nicholas, The Performance of Private Equity Portfolio Companies During the COVID-19 Pandemic (May 26, 2023). Leeds University Business School Working Paper, Available at SSRN: https://ssrn.com/abstract=4301174
Bernstein, Shai and Lerner, Josh and Mezzanotti, Filippo, Private Equity and Financial Fragility During the Crisis (July 2017). NBER Working Paper No. w23626, Available at SSRN: https://ssrn.com/abstract=3011104
Gompers, Paul A. and Kaplan, Steven Neil and Mukharlyamov, Vladimir, Private Equity and Covid-19 (October 2020). NBER Working Paper No. w27889, Available at SSRN: https://ssrn.com/abstract=3705100
Thomas, Jason, The Credit Performance of Private Equity-Backed Companies in the 'Great Recession' of 2008–2009 (March 31, 2010). Available at SSRN: https://ssrn.com/abstract=1582666
Kaplan, Steven Neil and Stromberg, Per, Leveraged Buyouts and Private Equity (June 2008). Available at SSRN: https://ssrn.com/abstract=1194962
Learn more about the BVCA's Research Advisory Group
These studies have been compiled with the support of the BVCA Research Advisory Group, a committee of senior academics and practitioners who enable us to access a wider pool of research. The BVCA Research team would like to thank all members of the Group for their input, guidance and advice.
