Leverage not a conclusive factor to explain insolvencies, academics say

The study was conducted by academics Mike Wright (Imperial College) and Nick Wilson (Leeds University), who analysed a data set comprising more than nine million UK-based businesses, including 153,000 insolvencies, over the 1995-2010 period.

First of all, leverage is not the characteristic that distinguishes failed buyouts from those surviving. "Controlling for leverage does not significantly change the coefficient on the private equity dummy and thus private equity insolvencies are not associated with leverage," Wright and Wilson argue.

Furthermore, the two researchers found out that private equity-backed buyouts completed post-2003 are not riskier compared to the overall sample once controlled for size, age, macro and industry characteristics. If anything, private equity's hands-on approach can help companies steer away from the brink in difficult times.

"Our findings suggest active involvement by private equity firms help portfolio companies deal better and more timely with trading difficulties, particularly in the more recent period leading up to the credit crunch," the paper notes. "We suggest that private equity-backed companies, as well as targeting better buyout prospects, are in a better position, because of active ownership and governance, to adjust capital structure over the economic cycle and, therefore, manage insolvency risk and protect assets."

For instance, management buy-ins (MBIs) are statistically carrying the highest risk profile, but private equity involvement reduces the risk of MBI failures, according to the study.

The full paper – entitled "Private Equity, Buy-outs, and Insolvency Risk" – is available on demand from Imperial College London.

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