Studies of the value of private equity

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.


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