Private Equity, Buy-outs and Insolvency Risk

Private equity restructuring using debt has been criticized for increasing financial distress and bankruptcy especially following the financial crisis. We build a unique dataset comprising the population of over 9 million firm-year observations and 153,000 insolvencies during the period 1995-2010. We compare the insolvency hazard of the spectrum of buy-out types within the corporate population over time and investigate the risk profile of the companies pre-buy-out. Controlling for size, age, sector and macro-economic conditions, private-equity backed buy-outs are no more prone to insolvency than non-buy-outs or other types of management buy-ins. Moreover, leverage is not the characteristic that distinguishes failed buy-outs from those surviving.