Private equity-backed companies weathered “Great Recession” better than peers, new PEC study finds
WASHINGTON DC, MARCH 31, 2010—Private equity-backed companies weathered the “Great Recession” significantly better than comparable businesses, according to a new study released today by the Private Equity Council (PEC).
The study found that the annualized default rate for the more than 3,200 private equity-backed companies acquired between 2000 and 2009 and held through 2008-2009 was 2.8 percent during the two-year recession. That compares to a 6.2 percent annualized default rate for similarly-financed businesses.
“This study is an important contribution to an informed discussion about private equity ownership,” said PEC President Douglas Lowenstein. “The low default rate is another indicator that undercuts popular myths about private equity ownership and suggests that private equity firms are effective at steering companies through troubled times.”
The PEC’s findings are consistent with a variety of independent research studies conducted in the past few years, including a 2008 report by the Bank for International Settlements (BIS) and a 2009 study by Steven N. Kaplan of the University of Chicago and Per Strömberg of the Stockholm School of Economics.
The BIS study found that private equity-backed companies had annualized default rates of 2.13 percent from 1982 to 1986; 3.14 percent from 1987 to 1991; 2.63 percent from 1992 to 1996, and 3.84 from 1997-2001. Kaplan and Strömberg reported a rate of 1.2 percent over the 32 years from 1970 to 2002. The PEC study is the first to analyze data from the 2008-2009 recession.
The PEC findings are at odds with forecasts made by credit rating agencies Moody’s and Standard and Poor’s and by the Boston Consulting Group that the default rate for private equity-backed companies would rise significantly during the recession.
Moody’s, S&P and BCG
Moody’s and S&P both have produced research documents suggesting that private equity-backed company default rates are higher than supported by the data analyzed by the PEC. The Boston Consulting Group in 2008 predicted that nearly 50 percent of the world’s private equity-backed companies would default in three years.
The PEC study notes that the Moody’s analysis expanded the definition of “default” to capture voluntary transactions to deleverage companies. S&P broadened its definition of private equity-related transactions to include a defaulted business that has had any dealing with a “private equity” firm, however minor, or however long ago, and includes holding companies in its definition of “private equity” firm.
In addition, the Boston Consulting Group (BCG), in an oft-cited study, used credit spreads at the height of the financial crisis to predict that nearly half of the world’s private equity-backed companies would default within three years.
Findings
The main findings of the PEC study are:
• During the “Great Recession” of 2008-2009 private equity-backed businesses defaulted at less than one-half the rate of comparable companies: 2.84 percent versus 6.17 percent.
• A large number of the transactions that ultimately defaulted involved little to no leverage. Some defaulted investments represented “all equity” investments into risky companies, some of which were acquired out of a previous bankruptcy.
• The defaults tended to correlate to overall economic activity. For example, companies overrepresented in the default group were media companies struggling with declining ad revenue and new competition and auto parts suppliers devastated by the decline in U.S. automotive sales.
• It is highly unlikely that the cumulative default rate of private equity acquisitions will approach anything close to the highs feared by critics.
Data and Methodology
The PEC report relies on a data set of more than 3,200 U.S. companies acquired by private equity investors in a buyout or similar transaction between 2000 and 2009 and held through the 2008-2009 recession. The data set excludes investments that were “substantially” exited thus reducing the influence of the private equity investors.
The methodology defines “default” as a missed payment or bankruptcy filing—the same definition used by the International Swaps and Derivatives Association (ISDA) to determine whether a default has occurred for the purpose of a credit default swap (CDS) contract. To determine which of the companies covered in the study defaulted, the paper relies on data provided by Thomson Reuters and Dow Jones, supplemented with additional defaulted companies identified through PitchBook and the Private Equity Council’s proprietary data.
About the Private Equity Council
The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).
# # #
