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Private equity-backed buyouts are less likely to fail than non private equity-backed buyouts, according to a report published today by a team of academics.
Private Equity and Insolvency compares the failure rates of 140,000 private equity-backed and non-private equity backed businesses between 1995 and 2009.
The results show that buy-outs 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.
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The research was carried out by the Centre for Management Buyout Research at Nottingham University Business School, the Credit Management Research Centre at Leeds University Business School, and The Entrepreneurship and Innovation Centre University of Birmingham Business School, and was commissioned by the British Private Equity and Venture Capital Association (BVCA).
Other key findings of the report include:
• Private equity involvement significantly reduces the risk of buyout failure;
• Private equity owned companies, due to the more hands on approach of private equity firms over the period, have over twice the debt recovery rate compared to publicly owned companies;
• Leverage levels do not distinguish between buyouts that fail from those that survive. The distinguishing feature is how the companies are managed and their ability to generate cash;
• PLC non-executive directors appear generally less involved than boards in private equity-backed buyouts when restructuring becomes necessary. PLCs can face greater problems in injecting new cash as they need to issue a formal investment proposal;
• Private equity firms select the best opportunities in terms of a company’s prospective profitability, ability to generate cash and therefore cover the interest on debt;
• Private equity-backed buyouts have a significantly better coverage ratio (the ability to pay interest on debt from profit and cash-flow) than non-private equity backed businesses.
“These are important findings in the context of the current policy debates surrounding private equity ownership,” said Professor Mike Wright of Nottingham University Business School.
“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 and, where problems emerge, private equity firms appear to be more effective at structuring solutions to debt problems.”
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 buy-outs.
“Although leveraged, private equity-backed buyouts generate sufficient cash to cover interest payments and show adequate coverage ratios. Moreover, there is evidence that stakeholders in private equity backed deals are proactive in helping their portfolio companies deal better and more timely with trading and/or financing difficulties, particularly in the more recent period leading up to the credit crunch.”
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Notes to editors:
The University of Nottingham is ranked in the UK's Top 10 and the World's Top 100 universities by the Shanghai Jiao Tong (SJTU) and the Times Higher Education-QS World University Rankings.
More than 90 per cent of research at The University of Nottingham is of international quality, according to RAE 2008, with almost 60 per cent of all research defined as ‘world-leading’ or ‘internationally excellent’. Research Fortnight analysis of RAE 2008 ranks the University 7th in the UK by research power. In 27 subject areas, the University features in the UK Top Ten, with 14 of those in the Top Five.
The University provides innovative and top quality teaching, undertakes world-changing research, and attracts talented staff and students from 150 nations. Described by The Times as Britain's “only truly global university”, it has invested continuously in award-winning campuses in the United Kingdom, China and Malaysia. Twice since 2003 its research and teaching academics have won Nobel Prizes. The University has won the Queen's Award for Enterprise in both 2006 (International Trade) and 2007 (Innovation — School of Pharmacy), and was named ‘Entrepreneurial University of the Year’ at the Times Higher Education Awards 2008.
Nottingham was designated as a Science City in 2005 in recognition of its rich scientific heritage, industrial base and role as a leading research centre. Nottingham has since embarked on a wide range of business, property, knowledge transfer and educational initiatives (www.science-city.co.uk) in order to build on its growing reputation as an international centre of scientific excellence. The University of Nottingham is a partner in Nottingham: the Science City.
A copy of the report, Private Equity and Insolvency, is available on request.