Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Insolvency risk lower for private equity-backed companies

08.04.2010
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.

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.”

Emma Thorne | EurekAlert!
Further information:
http://www.nottingham.ac.uk

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: The pyrenoid is a carbon-fixing liquid droplet

Plants and algae use the enzyme Rubisco to fix carbon dioxide, removing it from the atmosphere and converting it into biomass. Algae have figured out a way to increase the efficiency of carbon fixation. They gather most of their Rubisco into a ball-shaped microcompartment called the pyrenoid, which they flood with a high local concentration of carbon dioxide. A team of scientists at Princeton University, the Carnegie Institution for Science, Stanford University and the Max Plank Institute of Biochemistry have unravelled the mysteries of how the pyrenoid is assembled. These insights can help to engineer crops that remove more carbon dioxide from the atmosphere while producing more food.

A warming planet

Im Focus: Highly precise wiring in the Cerebral Cortex

Our brains house extremely complex neuronal circuits, whose detailed structures are still largely unknown. This is especially true for the so-called cerebral cortex of mammals, where among other things vision, thoughts or spatial orientation are being computed. Here the rules by which nerve cells are connected to each other are only partly understood. A team of scientists around Moritz Helmstaedter at the Frankfiurt Max Planck Institute for Brain Research and Helene Schmidt (Humboldt University in Berlin) have now discovered a surprisingly precise nerve cell connectivity pattern in the part of the cerebral cortex that is responsible for orienting the individual animal or human in space.

The researchers report online in Nature (Schmidt et al., 2017. Axonal synapse sorting in medial entorhinal cortex, DOI: 10.1038/nature24005) that synapses in...

Im Focus: Tiny lasers from a gallery of whispers

New technique promises tunable laser devices

Whispering gallery mode (WGM) resonators are used to make tiny micro-lasers, sensors, switches, routers and other devices. These tiny structures rely on a...

Im Focus: Ultrafast snapshots of relaxing electrons in solids

Using ultrafast flashes of laser and x-ray radiation, scientists at the Max Planck Institute of Quantum Optics (Garching, Germany) took snapshots of the briefest electron motion inside a solid material to date. The electron motion lasted only 750 billionths of the billionth of a second before it fainted, setting a new record of human capability to capture ultrafast processes inside solids!

When x-rays shine onto solid materials or large molecules, an electron is pushed away from its original place near the nucleus of the atom, leaving a hole...

Im Focus: Quantum Sensors Decipher Magnetic Ordering in a New Semiconducting Material

For the first time, physicists have successfully imaged spiral magnetic ordering in a multiferroic material. These materials are considered highly promising candidates for future data storage media. The researchers were able to prove their findings using unique quantum sensors that were developed at Basel University and that can analyze electromagnetic fields on the nanometer scale. The results – obtained by scientists from the University of Basel’s Department of Physics, the Swiss Nanoscience Institute, the University of Montpellier and several laboratories from University Paris-Saclay – were recently published in the journal Nature.

Multiferroics are materials that simultaneously react to electric and magnetic fields. These two properties are rarely found together, and their combined...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

“Lasers in Composites Symposium” in Aachen – from Science to Application

19.09.2017 | Event News

I-ESA 2018 – Call for Papers

12.09.2017 | Event News

EMBO at Basel Life, a new conference on current and emerging life science research

06.09.2017 | Event News

 
Latest News

Rainbow colors reveal cell history: Uncovering β-cell heterogeneity

22.09.2017 | Life Sciences

Penn first in world to treat patient with new radiation technology

22.09.2017 | Medical Engineering

Calculating quietness

22.09.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>