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Private Equity, Buy-outs, Leverage and Failure

Nick Wilson
Credit Management Research Centre
Leeds University Business School


Mike Wright
Centre for Management Buy-out Research
Nottingham University Business School


Ali Altanlar
Centre for Credit Management Research
Leeds University Business School


This draft May 19th, 2010


We study the determinants of failure, defined as entering the bankruptcy process, in a unique dataset comprising the population of over 8 million company-year observations of companies in the UK over the period 1995-2009, of which over 140,000 had failed. We examine the characteristics of failed and non-failed companies and build models that predict the likelihood of insolvency for the company population and test for differences in insolvency risk for company types. Specifically, whether the firm involved a management buyout or management buy-ins, and whether the buy-out/buy-in was private equity backed. Controlling for size, age, sector and macro-economic conditions (base hazard) we find that private-equity backed buyouts post 2003 are not riskier than the non-buyout population. We find that leverage does not distinguish buy-outs that fail from those that survive. We suggest that private equity companies both target better prospects and are in a better position to adjust capital structure over the cycle and, therefore, manage insolvency risk.


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