Here is a very useful survey by Steven M. Davidoff, excerpt:
…in a separate paper, Steven Kaplan of the University of Chicago and Mr. Stromberg estimated that private equity-owned firms had a default rate of 1.2 percent a year from 1980 to 2002. That compares with Moody’s Investors Service’s reported default rate of 1.6 percent for all corporate bond issuers in the United States in the same time period.
Private equity-owned companies may have a lower general default rate because of the better debt terms that sophisticated private equity firms can negotiate. For example, Moody’s has found that an outsize number of companies owned by private equity firms avoided default during the financial crisis because they had so-called covenant-lite debt, which had fewer terms that could be violated.
Beyond default rates, evidence of the private equity industry’s ability to create value is still surprisingly uncertain, given that the industry has more than 30 years of history. One of the reasons is that private equity firms do not generally publicly disclose the performance of their buyouts.
…A new paper, however, finds evidence that private equity firms do add value. Adam C. Kolasinski and Jarrad Harford of the University of Washington examined 788 large private equity buyouts in the United States. They found that private equity-owned companies invested more efficiently than other companies, a fact the authors attributed to private equity firms’ greater access to capital. The authors also found that the payment of large dividends to private equity firms, a common practice, did not create future financial distress.
There is more of interest at the link. “Some positives, lots of uncertainty” would be a good description of the available evidence.
I’m not certain why anyone would expect private equity to perform any better or worse than any other organizers of capital.
What’s this BS about “efficiency” and “investing” and other right-wing buzzwords? Can we just forget the empiricism and logic and just go back to histrionically shrieking against private equity because a lot of its participants are rich white men, who we all know are just in it to fire people and take over companies for teh evuls?
I have no problem with private equity and white men who get rich doing it. I do have a problem with the carried interest exception. I particularly have a problem with presidential candidates who simultaneously benefit from the carried interest exception and pledge not to raise taxes even if they are offset 10:1 with spending cuts.
+1
Private Equity is dominated by Jews. Jews aren’t White.
Yeah that Romney guy, always reading his Torah.
Also, fuck you.
I went through the first paper (Hotchkiss, Smith, and Stromberg). Personally, I’d like to see more details regarding their hazard model. They don’t share many details at all. I worry because they actually find that P.E. backed firms due indeed have a higher probability of default in each of their hazard models. It’s just not significant in the final version with all of the controls. This worries me a bit because, unless you account for unobserved heterogeneity, there’s a sorting/selection effect that happens over time with hazard models that results in biased coefficients. If I remember correctly, it’s an attenuation bias (but I could be wrong…I think Heckman Singer (1984) covers this topic). If that’s the case, the attenuation bias could be playing a role in the positive, but insignificant conclusion they reach. It’s possible that when correcting for the cause of that bias, the result would become large enough to be significant. Or maybe their conclusion is correct. It’s just hard to say without knowing the specifics of their model and without taking the time to read up on frailty and remind myself of the details.
In short, I know there are real issues there. I just don’t recall all the details nor is it clear what they actually did.
Surely nobody should care about default probabilities, only loss distributions. Especially if they avoided default just by virtue of not triggering covenants?
Yes.
That is, “yes” to PG’s comment. sorry.
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It is my experience that PE pushes banks around with some ease both due to greater sophistication. PE bargaining power is very strong. Banks find it hard to differentiate their offering.
In addition to light convenants, I can think of two other reasons PE default is lower than average despite debt heavy capital structures. (1) Businesses are rarely surprised by default. It is often a gradual process. When PE sees a default on the horizon they can renegotiate the debt terms to avoid default. The trade might be a debt package on another portfolio company in exchange for reworked covenants on a troubled business. (2) Many PE firms have negotiated equity cures as a part of the debt agreement. They can inject additional capital into a business to avoid a covenant breach. It is difficult for non-PE firms to use these solutions.