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Is private equity good for the economy? Show more Show less
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Private equity firms have been called "locusts" by the German chancellor Angela Merkel but proponents argue that private equity investors make companies more efficient, create economic growth and provide good economic returns to investors.

Private equity leads to higher default rates and more bankruptcies and worse outcomes for customers and workers Show more Show less

Private equity is a misnomer and should properly be called leveraged buyouts. Leveraged buyouts, by definition, increase borrowing and raise the probability of bankruptcy.
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Defaults for private equity (leveraged buyouts) can be 10x higher than for non-LBO firms

You do not need an MBA from Wharton to know that loading up companies with debt will lead to bankruptcy. Research shows that private equity funds acquire healthy firms and increase their probability of defaultby a factor of 10. They are the antithesis of conservative management.
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The Argument

Recent studies show that default rates are 10 times higher for private equity companies. "Tracking a sample of 484 public to private LBOs for 10 years after going private, we find a bankruptcy rate of approximately 20%, an order of magnitude greater than the 2% bankruptcy rate for the control sample. Our analysis is robust to macro and industry shocks as potential driving forces behind bankruptcy. " https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423290

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Further Reading

Here is a very good study. Leveraged Buyouts and Financial Distress Brian Ayash, California State Polytechnic University, San Luis Obispo - Finance Area Mahdi Rastad, Orfalea College of Business, California State Polytechnic University https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423290

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    This page was last edited on Thursday, 27 Feb 2020 at 14:49 UTC

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