The impact of private equity ownership on financial distress recovery

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Financial Distress Recovery

Master’s Thesis Finance – 14 July 2016

M.L.M. Wouters

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STATEMENT OF ORIGINALITY

This document is written by student M.L.M. Wouters, who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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The Impact of Private Equity Ownership on Financial Distress

Recovery

M.L.M. Wouters

University of Amsterdam, Amsterdam Business School, The Netherlands

Abstract

The aim of this thesis is to assess whether distressed PE-backed companies experience faster turnarounds compared to non PE-backed companies. Several limitations in the literature indicate that the role of PE during the repositioning of portfolio companies in financial distress is not yet well defined and is therefore still an open empirical question. In this thesis, both the traditional views on the impact of PE on firm performance and relatively new perspectives on financial distress are included and divided into a “bright side” and a “dark side” view. By using a sample of 44 European backed companies over the period 2000-2005 and a matched sample of non PE-backed companies, the results of this thesis are supportive of arguments in favour of the “dark side” view, since they suggest that PE-backed companies recover significantly slower from overall financial distress relative to non PE-backed companies. Distress recovery expressed by economic efficiency follows the same slower rate for PE-backed companies in the first year preceding the distress year, but no evidence for long-term conclusions is visible. Finally, the change in operating profitability relative to the distress year for PE-backed companies shows opposite results and thus rule in favour of the “bright side” view. However, this conclusion can only be drawn for the second year preceding the buyout, as PE-baked companies only experience faster turnaround in profitability in that specific year.

JEL Classification: G20

G24

G34

Keywords: Private Equity

Buyout

Leverage

Performance

Financial Distress

M.L.M. Wouters

Amsterdam Business School

Vechtstraat 132-3

Plantage Muidergracht 12

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PREFACE AND ACKNOWLEDGEMENTS

This Master’s Thesis is the final chapter of my academic career and also the best part of it. At least, if you would ask me. I finally had the opportunity to choose a research topic that already triggered me for years: private equity. When flipping through leading newspapers, the very term continues to evoke admiration, envy, and even fear. And still, after years of research, private equity firms are subject to a range of different and often contradictionary perceptions. I could not conclude otherwise than to choose this topic for my Master’s Thesis, as it would be both challenging and interesting to further research.

Firstly, I would like to express my sincere gratitude to my supervisor Dr. J.E. Ligterink for his continuous support and for sharing his knowledge, experience, and feedback. In addition, I would like to thank Dr. J.E. Ligterink and Dr. J.K. Martin for offering me the opportunity to participate in the private equity research for the Dutch Ministry of Finance. Working on that research provided me more in-depth knowledge, which brought my Master’s Thesis to a next level. Finally, I would like to thank a close contact for introducing me to various Dutch private equity firms, which resulted in the integration of real-life examples and insights into my Master’s Thesis.

M.L.M. Wouters

MSc Business Economics – Finance Track Supervisor: Dr. J.E. Ligterink

Student: M.L.M. Wouters Student Number UvA: 11093293 Date: 14 July 2016

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1. INTRODUCTION

“It’s how you deal with failure that determines how you achieve success” ~ David Feherty ~

The impact of private equity (PE) on portfolio companies has become a popular research topic, especially after the second buyout wave culminating in 2007 (Kaplan & Strömberg, 2009). The peak years lasted from January 2005 until June 2007 and accounted for approximately 40 per cent of the total value of worldwide buyout deals completed between 1984 and 2007 (Kaplan & Strömberg, 2009). Hereafter, both the corporate and financial world suffered from the financial crisis, which eventually reshaped the whole PE sector (Gatti & Chiarella, 2015). More specifically, new buyout activity experienced historically low levels and PE funds had to invest in secular growth-oriented assets due to low growth in Europe (Gatti & Chiarella, 2015). But even now, when the global economy is recovering only slowly, PE firms can already be carefully optimistic following the ongoing revival of the banking sector (KPMG, 2015). This rapid growth of PE activity and buyouts over the past years, capitalised on opportunistic environments, has represented an integral part of the global financial world. It has gained considerable attention due to its influence on both the overall economy and target companies by introducing a strict view of financial discipline and efficiency, geographical expansion, and return-based strategies (Gatti & Chiarella, 2015). However, as lower economic growth in the medium term is forecasted for most European markets, it will become more difficult for PE firms to keep adding value to their target companies, and thus requiring thorough operational knowledge on targets before the buyout and probably further value-enhancing interference afterwards (Harris, Jenkinson, & Kaplan, 2014).

These findings regarding the PE sector and buyouts are generally acknowledged and also increasingly researched. However, there exists some controversy regarding whether the success in the PE model comes from value creation or from value transfer. In this thesis, both the traditional views on the impact of PE on firm performance and relatively new perspectives on financial distress are included and divided into a “bright side” and a “dark side” view. The “bright side” view hails PE as an efficient form of organisation that creates value and economic efficiencies for companies by improving their strategy and operations (i.e. Jensen, 1989; Kaplan, 1989a; Lichtenberg & Siegel, 1990). Studies that incorporate the “bright side” view argue that high-level specialisation and involvement of PE firms result in, amongst others, management incentives, strong board governance, and concentrated shareholder base. Consequently, this should lead to better-than-average performance and long-term success. The disciplining role of leverage is a crucial part of this superior governance implemented by PE, as it decreases agency problems. High debt levels prevent managers from wasting resources, because they eventually have to repay the debt. On the contrary, the “dark side” view points out that high debt levels have negative effects as well. Studies that incorporate the “dark side” view argue that PE investors do not create value, but transfer value from other stakeholders. According to Guo, Hotchkiss, and Song (2011),

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PE returns are mainly boosted because of higher tax shields caused by higher debt levels. In addition, increasing debt levels can result in higher risk of financial distress or bankruptcy (i.e. Kaplan & Stein, 1993). Furthermore, higher bankruptcy rates may transfer value from the financial system as a whole, as it may have a negative impact on financial institutions and induce contagion effects when large buyout credits fail (Tykvová & Borell, 2012). The effect of PE on both the economy and individual firm performance is thus still a major source of discussion.

This thesis specifically contributes to the ongoing discussion by researching whether European distressed backed companies experience faster turnarounds compared to non PE-backed companies during the period 2000-2015. Several limitations in the literature indicate that the role of PE during the repositioning of companies in financial distress is not yet well defined and is therefore still an open empirical question. Hotchkiss, Smith, and Strömberg (2014) recently assessed whether and how PE-backed firms manage through the resolution of financial distress, and a few more studies covered whether or not PE-backed firms are more disposed to bankruptcy (i.e. Tykvová & Borell, 2012; Wilson & Wright, 2013). However, this thesis does not focus on companies that have already experienced years of distress and are therefore forced to restructure their business or exit through bankruptcy. Instead, this study researches the period before, when companies are operating in their first year of financial distress and official restructurings and bankruptcies are not yet in order. This will shed light on the question whether PE firms are indeed able to recover their distressed portfolio companies faster compared to other owners, which is not yet verified with empirical evidence. Nevertheless, following the recent difficulties in sectors such as oil and gas in the wake of collapsing commodity prices, this question is nowadays a hot topic in the corporate world, for which strategy consulting firms and investment banks are extensively researching the best business strategies (Kazimi & Tan, 2016). In addition, distressed PE has become an increasingly prominent part of the overall PE industry, expressing the importance of finding the real impact of PE on financial distress recovery of portfolio companies. Furthermore, this thesis specifically focuses on Europe, as this continent recently experienced a long-lasting recession with many companies suffering from financial distress (Oakley, 2016). The United States is less interesting here since, after the global financial crisis ended in 2009, Europe fell into a longer recession in the third quarter of 2011 that lasted for another two years (Weisbrot, 2014). Moreover, Europe’s economic situation remains a bigger challenge, as it requires seventeen separate legislatives to work together (Weisbrot, 2014). Finally, it is interesting to focus the research on Europe since after the start of the new millennium in 2000, PE transactions have spread more and more throughout Europe, therefore increasing the importance of this continent for PE (Tykvová & Borell, 2012).

By combining the results of studies by, amongst others, Jensen (1989), Kaplan and Strömberg (2014), Tykvová and Borell (2012), and Hotchkiss et al. (2014), this thesis hypothesises that PE-backed companies experience faster turnaround performance after

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experiencing financial distress relative to non PE-backed companies. To test whether this hypothesis can be accepted or rejected, this study applies both univariate and multivariate analyses. Then, first the overall distress level of companies is tested by using the Z-score for private companies, as constructed by Altman (2002). Companies experiencing a Z-score of below 1.23 are considered financially distressed and therefore included in the research samples. The Zephyr database of Bureau van Dijk provides the required European PE buyout companies and the Amadeus database provides the corresponding accounting data, as well as companies for the control sample. The control sample includes solely companies operating in similar countries and industries, as well as with the same distress years and company sizes. Furthermore, distress recovery is segmented into overall distress, operating profitability, and finally economic efficiency in order to provide a broader picture of different recovery measures. Finally, two case studies are included to provide real-life examples that support the results of this study and to provide a more in-depth analysis on the potential performance of PE firms in distressed situations. The results of this research are contradicting the aforementioned distress hypothesis, since they suggest that PE-backed companies recover significantly slower from overall financial distress relative to non PE-backed companies. Distress recovery expressed by economic efficiency follows the same slower rate for PE-backed companies in the first year preceding the distress year, but no evidence for long-term conclusions is visible. Finally, the change in operating profitability relative to the distress year for PE-backed companies shows opposite results and thus rule in favour of the “bright side” view. However, this conclusion can only be drawn for the second year preceding the buyout, as PE-baked companies only experience faster turnaround in profitability in that specific year. It can therefore be concluded that, overall, the empirical findings clearly do not support the theories by Jensen (1989), Kaplan (1989a), and Kaplan and Strömberg (2009) arguing that buyout companies are superior to traditional companies as an organisational form because of greater performance incentives. In fact, the results are more supportive of the “dark side” story suggesting that PE firms have little incentive to support financially distressed portfolio companies, for example when they already received their required investment returns by paying themselves large, debt-financed dividends or by asset sales that reap short-term profits (Hotchkiss et al., 2014).

The remainder of this thesis is structured as follows. First, chapter 2 provides an overview of the traditional literature on PE and its impact on various performance metrics of portfolio companies. Next, chapter 3 discusses more related literature on PE ownership and financial distress, followed by the three different hypotheses tested throughout this thesis. Then, chapter 4 provides a detailed description of the data and methodology used, and section 5 presents and interprets the results of this research. Thereafter, section 6 discusses these findings and provides some additional empirical results as well as relevant case studies and suggestions for further research. Finally, section 7 contains a summary and concluding remarks.

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2. GENERAL LITERATURE REVIEW

This chapter provides an overview of the existing literature on PE transactions and ownership. The first section briefly describes the concepts of PE firms and funds, followed by PE buyouts in the European market. The final section discusses the effect of PE on portfolio firm performance, including evidence from both theoretical and empirical studies.

2.1 Private Equity Firms and Funds

Typical PE firms are investment managers, organised as a partnership or limited liability corporation investing in the private equity of operating companies (Kaplan & Strömberg, 2009). They usually raise equity through PE funds, for which they receive a periodic management fee as well as a share in the profits earned. This management fee is paid by the investors of the fund, who commit to the fund by providing a certain amount of money to pay for company acquisitions. The PE firms serve as the general partner of the fund, typically providing 1 per cent of the total capital, while the limited partners provide the rest of the capital. Limited partners usually consist of institutional investors, such as insurance companies, public and corporate pension funds, endowments, and wealthy individuals (Kaplan & Strömberg, 2009).

The lifetime of PE funds is usually fixed with a duration of approximately ten years, which can be extended up to three additional years. In the first five years, PE firms typically invest the capital committed to the fund into companies, while they use the remaining five to eight years to return the capital to limited partners. As a general partner, PE firms determine how to deploy their investment funds, only following basic covenants, including restrictions on the maximum amount of capital to be invested in a company, the types of securities the fund is allowed to invest in, as well as restrictions on the amount of leverage at the fund level (Kaplan & Strömberg, 2009). Hence, the limited partners have little to say, except what is stated in the covenants.

As mentioned earlier, the PE firm is compensated by an annual management fee and a share of the profits. The management fee consists of a percentage of the capital committed, in addition to a percentage of the capital employed when investments are realised. The share of profits is usually referred to as “carried interest” and is typically equal to approximately 20 per cent. However, PE firms sometimes also charge additional deal and monitoring fees to their newly invested companies. PE fundraising negotiations then determine the extent to which these fees are shared, often by splitting 50-50 between general and limited partners (Kaplan & Strömberg, 2009).

2.2 Private Equity Buyouts

In a typical PE buyout, capital is used to fund the growth of a non-listed company, privatisation of a company (institutional or management buyout), privatisation of a business unit (divisional

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buyout), continuance of a company with new shareholders (management buyin), interim financing, delisting of a company (public-to-private), restructuring (turnaround) or to fund a start-up (venture capital) (Jong, de, Roosenboom, Verbeek, & Verwijmeren, 2007). Institutional buyouts are the most common type of these transactions, followed by management buyouts. The focus of this thesis is therefore on institutional buyouts, referring to PE funds acquiring majority stakes in individual companies, also because they involve the most transparent PE fund role (Wilson, Wright, Siegel, & Scholes, 2012).

PE funds generally finance investments using only 10 to 40 per cent of their own equity, in addition to approximately 60 to 90 per cent debt financing; hence the term leveraged buyout (Kaplan & Strömberg, 2009). This leverage usually consists of a senior and secured fraction that is arranged by a bank or investment bank, additionally to a junior and unsecured loan fraction financed by high yield bonds or mezzanine debt (Kaplan & Strömberg, 2009). Although banks have always been the primary investors in senior loans, institutional investors have also purchased a large fraction of these loans during last years (Kaplan & Strömberg, 2009). These institutional investors consist of hedge funds and “collateralised loan obligation managers”, who collect loans together in a pool and then sell different pieces of the pool to other investors. The new management of the buyout company, whether or not identical to the pre-buyout management team, often also finances a small fraction of the equity contribution. In addition, the use of “hybrid” shareholder loans as a form of funding has risen significantly during the last ten years due to increased pressure from credit agencies (KPMG, 2015). Credit agencies namely treat loans that meet specific criteria as equity, which prevents marking down of credit ratings while retaining the benefits from shareholder loans funding (KPMG, 2015).

Concerning the trends of PE transactions, it can be shown that they have experienced both boosts and busts over the years. The peak years lasted from January 2005 until June 2007 and accounted for approximately 40 per cent of the total value of worldwide deals completed between 1984 and 2007 (Strömberg, 2008). Hereafter, both the corporate and financial world suffered from the financial crisis, which eventually reshaped the whole PE sector (Gatti & Chiarella, 2015). More specifically, new buyout activity experienced historically low levels and PE funds had to invest in secular growth-oriented assets due to low growth in Europe and were seeking international exposure and expansion within their portfolio companies (Gatti & Chiarella, 2015). This trend also becomes clear in figure 1, which provides an overview of the value of PE deals in the European Union during 2000-2014. As the figure shows, Europe experienced the highest PE deal value in 2007. Additionally, the remaining data shows that the total deal value dropped in 2008 and 2009 due to the financial crisis, but slowly increased again afterwards and then heavily dropped in 2012. From then onwards, PE experienced a durable rebound and profited from a market with an oversupply of capital that shows no signs of breaking anytime soon (Bain & Company, 2015). In 2014, the number and value of buyouts and exits climbed to an industry

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record of which strong distributions of capital flowed back to limited partners, and thus into PE funds (Bain & Company, 2015). However, the question now rises whether PE funds are able to continue to display the resilience they have shown during these times of capital abundance and global growth. Although Europe has long been a powerful magnet for PE investors, macro economic challenges are currently threatening the continent’s decades-long programme to broaden and deepen its integration, and thus also potentially affect future PE investments (Bain & Company, 2015).

Figure 1: Private Equity Buyout Deals in Europe

Notes: This chart shows the deal value of PE investments in the European Union during 2000-2014. The chart solely includes PE buyout deals of which a portion of shares is placed with incumbent or new management. Data is extracted from the European Venture Capital Association (EVCA).

2.3 Private Equity Backed Firm Performance

Even though PE has become a popular research topic, the exact effect of PE on the economy and individual companies is still ambiguous. More specifically, there is some controversy in the literature regarding the key sources of success in the PE model, as it is questionable whether the success comes from value creation, value transfer, asymmetric information or just market timing. According to proponents, PE firms improve operations of their buyout companies and create economic value by increasing productivity and profitability of their portfolio companies (Kaplan & Strömberg, 2009). They hail PE as an efficient form of organisation that creates value and economic efficiencies, resulting in, amongst others, management incentives, strong board governance, and concentrated shareholder base. Critics, on the other hand, argue that PE firms do not create operational value, but take advantage of tax breaks and superior information or, alternatively, capitalise on market timing and mispricing (Kaplan & Strömberg, 2009). Additionally, there is a new group of PE performance researchers who argue that PE firms impact

0 10 20 30 40 50 60 70 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 D eal val u e i n € b il li on

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the performance of their portfolio companies by affecting the ability to handle financial distress (Hotchkiss, Smith, & Strömberg, 2014). In this thesis, both the traditional views on the impact of PE on firm performance and relatively new perspectives are included and divided into a “bright side” and a “dark side” view. The next chapter further elaborates on the new perspectives concerning PE and financial distress, while this chapter solely focuses on the traditional literature. The next sections present an overview of existing studies and their empirical evidence on the performance of PE-backed companies that is considered relevant for this research. As there appears to be no conclusive evidence regarding the exact effect of PE on firm performance, this literature review combines the “bright side” and the “dark side” view on the impact of PE ownership. When looking at firm performance of PE portfolio companies, this research includes operating performance, employment, taxes, asymmetric information, and finally market timing.

2.3.1 Operating Performance

The literature on operating performance of PE-backed companies is largely positive, since most researchers agree that PE investors create value to their target firms by increasing productivity and profitability (Kaplan & Strömberg, 2009). Jensen (1989) starts with this “bright side” view by arguing that buyout companies are superior to traditional companies as an organisational form because of greater performance incentives, including debt, monitoring, and milestones (referred to as “Jensen hypothesis”). As a first argument in favour of this hypothesis, he claims that high debt levels used for buyouts have to be paid off with regular fixed payments to debt holders, which withholds management from investing in negative net present value projects that descrease company value. In addition, PE firms monitor the performance of their portfolio companies by obtaining regular reports on performance and replacing underperforming managers. Finally, Jensen (1989) states that PE investors use ratchets and milestones in order to achieve performance targets. In the same year, Kaplan (1989a) also empirically researches the so-called “Jensen hypothesis” to show whether US public-to-private buyout companies in the 1980s indeed perform better. He finds that in the three years after the buyout, these companies experience an increase of 10 to 20 per cent in the ratio of operating income to sales. In addition, the ratio of cash flow to sales increases by 40 per cent, while the ratio of capital expenditures to sales of the buyout companies declines. According to Kaplan (1989a), these changes are coupled with an increase in absolute firm value, all caused by improved incentives rather than layoffs or managerial exploitation of shareholders through asymmetric information. Similarly, Lichtenberg and Siegel (1990) research US companies in the 1980s and find a positive effect of leveraged buyouts. They show that buyout companies have significantly higher rates of total factor productivity growth compared to non-buyout companies in the same industry.

The empirical evidence on the effect of PE on the performance of buyout companies post-1980s increasingly focuses on European countries. Consistent with previous results on US

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companies, most studies find evidence supporting the “bright side” story that leveraged buyouts are associated with significant improvements in operations and productivity. Bergström, Grubb, and Jonsson (2007) research the magnitude and determinants of the operating impact of PE buyouts in the Swedish market. They use earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin, return on invested capital (ROIC), and growth as metrics to measures the buyouts’ impact on operating performance and find significant positive results for the first two metrics. Growth does not appear to provide a corresponding result, but is also regarded as a less clear-cut measure of value creation. They finally conclude that the PE process does create a significant amount of value, however, they cannot define the key determinants of value creation, as most factors are not readily quantifiable. Cressy, Munari, and Malipiero (2007) also focus their research on Europe and study UK buyout companies over the period 1995 until 2000. Their results show that operating profits of PE-backed companies are higher compared to those of comparable non PE-backed companies by approximately 5 per cent. In addition, they report that industry specialisation of PE firms adds 8.5 per cent to this profitability advantage, while buyout specialisation has no effect on profitability but may provide a spur to growth. Finally, they find that profitability in the buyout year plays an important role in post-buyout profitability, suggesting that skills in investment selection and financial engineering techniques potentially have more impact on better firm performance than managerial incentives. Furthermore, Acharya, Gottschalg, Hahn, and Kehoe (2011) expand the research focus on Europe by using a dataset including all Western European transactions performed by very large PE firms. On average, they find higher improvement in sales and operating margin during the private equity phase, relative to that of listed peers, and after controlling for leverage and sector returns. They also argue that the presence of heterogeneous skills at the deal-partner level in large PE transactions has a positive effect on deal outperformance.

Likewise, Boucly, Sraer, and Thesmar (2011) study French buyouts between 1994 and 2004 and provide results in favour of the “bright side” view. More specifically, their results suggest that in the three years following a leveraged buyout, buyout companies become more profitable and grow much faster compared to their peer group. However, in contrast with previous studies, Boucly et al. (2011) claim that the main source of value creation in a leveraged buyout (LBO) is alleviation of credit constraints instead of cost cutting. They argue that evidence for cost cutting provided by, amongst others, Kaplan (1989a), Lichtenberg and Siegel (1990), and Amess and Wright (2007), is not fully representative for today’s typical LBO transaction. As an explanation, they state that many of these papers cover transactions in the 1980s, and nearly all of them concentrate on US or UK transactions. The 1980s include years of intense corporate restructuring caused by increasing international competition and deregulation of many industries, leading to financial pressure and therefore cost-cutting policies (Jensen, 1993). According to Strömberg (2008), the business model of PE might have changed since then. Furthermore, the

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reason for differences between the UK, the US, and other countries might be that the capital and credit markets in the UK and the US are large and well functioning. In countries where this is not the case, LBOs may help relax targets’ credit constraints, allowing them to take advantage of previously unexploited growth opportunities. Finally, Gaspar (2012) also studies French buyout during approximately the same time period and finds similar positive performance results for buyout targets after their transaction. LBO firms appear to have statistically higher return on invested capital, by approximately 4 to 5 per cent compared to matching control companies. Furthermore, Gaspar (2012) shows that this improvement in performance is associated with significantly higher growth rates of EBITDA and sales in the years after the buyout. The EBITDA margin of buyout companies shows an increase or constant level, while those of matching control firms shows a decrease of approximately 0.7 to 2.2 per cent after the buyout.

Scellato and Ughetto (2012) study buyout deals covering whole Europe, involving private-to-private transactions between 1997-2004 and a control sample of non-buyout companies selected through a propensity score matching methodology. For the short- and midterm, they find a positive impact of buyouts on the growth of total assets and a lower operating profitability with respect to the control group. More specifically, they report negative impact results on the operating performance of buyouts undertaken by generalist funds, while turnaround specialists show to have a positive impact on the operating performance of their buyouts. Furthermore, their evidence highlight that buyouts by PE investors from the same country have relative higher ex-post profitability performance.

Although the previously discussed studies provide largely uniform positive results for PE-backed buyout companies, and therefore supporting the “bright side” view, there are some general exceptions pointing more towards the “dark side” view. Guo, Hotchkiss, and Song (2008) study US buyouts during 1990 and 2006, for which they find either comparable to or only slightly higher gains in operating performance than those observed for matched control companies based on industry and pre-buyout characteristics. These variations in gains depend on the measure of performance and the studied post-buyout period. In fact, their results indicate modest increases in operating and cash flow margins, which are much smaller than those found for US data in the 1980s and for European buyouts completed in the 1990s. Furthermore, they find that cash flow gains are greater for companies with higher increases in leverage as a result of the buyout, as well as when the PE firm replaces the CEO of the target company at or soon after the buyout. Likewise, Weir, Jones, and Wright (2007) study public-to-private transactions in the UK during approximately the same period as Guo et al. (2008). For those transactions, they show deterioration in performance relative to the pre-buyout situation, but no worse performance compared to firms that remain public. They find similar results for PE-backed deals, however, without evidence that non PE-backed buyout companies perform better than the industry average. More specifically, according to their research, involvement of PE appears to have a negative

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effect on the change in profitability relative to the pre-buyout situation. When they compare PE-backed deals with the industry average, they find better performance results, while the same results are found when compared to non PE-backed deals. Leslie and Oyer (2008) also report little evidence that PE-owned firms outperform public firms in profitability or operational efficiency, based on a study on US data during 1996 and 2006. Finally, Meuleman, Amess, Wright, and Scholes (2009) focus their study specifically on performance implications of divisional buyouts versus buyouts from other sources, as they argue that these types of buyouts represent a substantially larger share of the PE buyouts compared to public-to-private transactions. Meuleman et al. (2009) also state that divisional buyouts are of interest in the context of synthesising agency and strategic entrepreneurship perspectives, since these buyouts usually involve target companies that initially suffered from agency problems and stifled entrepreneurial opportunities due to parental control structures. For these types of buyouts, they find no association with significant changes in profitability (measured by using returns on capital employed), but they do find an association with a significant increase in efficiency (measured by using sales per employee) compared to other types of buyouts. It can be concluded that the results of Guo et al. (2008), Weir et al. (2007), Lelsie and Oyer (2008), and Meuleman et al. (2009) suggest that there is a difference in the type and completion period of transactions. For example, post-1980s public-to-private transactions may be different compared to those of the 1980s and compared to LBOs overall, and divisional buyouts may differ from buyouts from other sources.

Finally, some caution needs to be taken into account when interpreting these findings. First, it must be noted that some studies are potentially subject to selection bias, since accounting data for private firms is not always available. Most US studies, for example, focus only on public firms or on LBOs that use public debt or subsequently go public, which may not be representative for the population (Kaplan & Strömberg, 2009). Second, some studies report that LBOs might increase current cash flows, but harm future cash flows due to declines in capital expenditures (Kaplan & Strömberg, 2009). Therefore, PE investors might force their buyout companies to boost current cash flows in order to service the buyout debt, which might be harmful to long-term performance. Cao and Lerner (2009) test this by looking at the performance of LBO companies after going through an initial public offering (IPO). They find positive industry-adjusted stock performance after such IPOs, and therefore do not confirm the concern for sacrificed long-term company performance. By studying post-buyout changes in innovation as measured by patenting, Lerner, Sorensen, and Strömberg (2011) also do not find results consistent with this hypothesis. According to their research, PE buyout companies that engage in patenting do not report any significant decline in innovation or patenting after the buyout. In addition, they find that patents filed post-buyout are more economically important compared to patents filed before the buyout, due to the few core focus areas of companies’ innovation activities.

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2.3.2 Employment

When considering the impact of PE ownership on employment, one of the arguments of the “dark side” view includes job destruction and wage cuts for PE buyout companies (Kaplan & Strömberg, 2009). Critics namely argue that these types of transactions are beneficial to PE investors at the expense of employees. Such reductions are also consistent with improvements in productivity and operations, but it must be noted that the political implications of such economic gains would be more negative. This section therefore discusses the most relevant empirical findings on the effect of PE buyouts on employment and wages of the buyout companies and shows that both findings supporting the “bright side” as well as the “dark side” view exist.

First, Kaplan (1989a) researches the employee wealth transfer hypothesis for his sample of US public-to-private buyout in the 1980s. He finds that for buyout companies that are forced to make large divestures and thus have to decrease their labour force, the median change in employment is 0.9 per cent. For buyout companies without such divestures, employment increases by a median of 4.9 per cent. Kaplan (1989a) therefore concludes that his results are not consistent with the “dark side” view of large decreases in employment after a buyout. However, for US LBOs completed within the same time frame, Lichtenberg and Siegel (1990) report results more supportive of the “dark side” view. They namely find a decline in employment relative to the industry, in addition to a lower rate compared to the pre-buyout period. For their research on the wage rate of LBO companies, they differentiate between production and nonproduction workers. For production workers, they show slightly increasing wage rates in relative terms after the LBO, while the wage rate of nonproduction workers shows a decrease within two years after the buyout. Davis, Haltiwanger, Handley, Jarmin, Lerner, and Miranda (2014) also study a large US sample of PE transactions, only over an extended period from 1980 until 2005, and find modest supportive evidence for the “dark side” employment hypothesis. For their sample of buyouts, they find a decline in employment of 3 per cent over two years post-buyout and 6 per cent over five years, relative to controls similar in terms of industry, size, age, and prior growth. These relative employment declines appear to be concentrated among public-to-private buyouts and companies operating in the service and retail sectors. Nonetheless, for a subset of their sample, Davis et al. (2014) report an increase in new jobs at new establishments, as well as more rapid acquisitions and divestments of establishments. The net impact on employment is therefore less than 1 per cent of initial employment, while the sum of gross job creation and destruction at target companies exceed that of controls by 13 per cent. They conclude that PE buyouts catalyse the creative destruction process in the labour market, which modestly impacts net relative job losses. The creative destruction response mainly involves a more rapid reallocation of jobs across establishments within target firms.

Outside the US, Amess and Wright (2006) research LBOs in the UK completed within the period 1999-2004 and find that LBOs do not have a significant effect on employment growth,

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while they do find significantly lower wage growth for LBOs compared to non-LBOs. When they divide LBOs in management buyouts (MBOs) and management buy-ins (MBIs), their results indicate that MBOs have higher employment growth, while MBIs have lower employment growth compared to peers in the same industry. Likewise, Meuleman et al. (2009) focus their study on UK buyouts from 1993-2003 and find that employment growth following a buyout is on average 0.36 per cent higher in divisional buyouts as compared to other types of private buyouts. In addition, according to their results, higher levels of PE firm experience are correlated with higher employment growth at portfolio companies. Furthermore, Gaspar (2012) studies leveraged buyouts in France and finds that labour costs decrease as a percentage of sales by approximately 1 to 2 per cent. According to his results, this decrease in labour costs appears to be caused by productivity gains rather than cuts in employment, since Gaspar (2012) also shows that total labour costs and employment of LBO firms evolve on par with industry trends.

Finally, the results of studies by Boucly et al. (2008) and Scellato and Ughetto (2012) are more in favour of the “bright side” story. Boucly et al. (2008) study French leveraged buyouts relative to an adequately chosen control group and find an increase in employment for LBO targets. Their research shows that this effect is statistically significant and economically large: between the four years pre- and post-buyout, employment appears to be 18 per cent higher for target companies compared to their control firms. Scellato and Ughetto (2012) base their study on a sample of European private-to-private buyouts and also find that companies undergoing a buyout outperform non-buyout companies in terms of employee growth rates.

2.3.3 Taxes

Another argument of the “dark side” view includes that PE funds take advantage of tax breaks instead of creating any operational value. Since PE funds usually acquire companies using a relatively large fraction of leverage and small fraction of equity, this possibly increases the value of buyout companies through the tax deductibility of interest (Kaplan & Strömberg, 2009). However, as mentioned by Kaplan and Strömberg (2009), it is very challenging to calculate the value of this tax shield accurately, as it involves estimating the tax advantage of debt (net of personal taxes), the expected performance of debt, and the riskiness of the tax shield. Kaplan (1989b) is the first to empirically study the value of tax benefits in US MBOs of public companies completed between 1980-1986. Depending on various assumptions, he finds that lower taxes due to higher interest deduction could explain approximately 4 to 40 per cent of the value of a company. This range is very wide following the difference in assumptions on debt repayment and personal taxes. The lower estimates are expected when it is assumed that the LBO debt is repaid in eight years and personal taxes offset the benefit of corporate tax deductions. The higher estimates of tax benefits as percentage of firm value creation are expected when it is assumed that the LBO debt is permanent and personal taxes provide no offset. When assuming

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that the true value lies somewhere in the middle, it is reasonable to say that the value of lower taxes due to increased leverage explains approximately 10 to 20 per cent of firm value (Kaplan & Strömberg, 2009). However, these would be estimates for PE buyouts in the 1980s, while estimates for the 1990s and 2000s should be lower due to decreasing corporate tax rates and the extent of leverage used in PE transactions (Kaplan & Strömberg, 2009).

2.3.4 Asymmetric Information

Proponents of the “dark side” view furthermore argue that PE investors have superior information on future portfolio company performance, which explains the favourable results on operating improvements and value creation (Kaplan & Strömberg, 2009). They claim that incumbent management is a plausible source of this superior information, since they have inside information on how to make their firm perform better. Supporters of PE agree on the last part, as one of the economic justifications for PE deals is that the experience of better incentives and closer monitoring stimulate managers to use their insider knowledge to achieve better firm performance (Kaplan & Strömberg, 2009). However, this is not the entire story, since a less attractive claim of critics includes that incumbent managers root in favour of a PE buyout. They argue that managers intend to keep their jobs under the new owners, for which they receive a lucrative compensation deal, and thus lose their willingness to fight for the highest price for existing shareholders (Kaplan & Strömberg, 2009). If this is true, the result is that PE buyers receive a better deal. However, several studies show that it is doubtful that operating improvements of buyout companies are merely the result of PE firms taking advantage of asymmetric information.

First, Kaplan (1989a) researches this claim by looking at publicly released financial projections for LBO companies, typically including forecasts of operating income. If the asymmetric information story holds, buyout company managers would purposely mislead public shareholders by understating the forecasts, causing systematic higher actual performance compared to forecasted performance. Alternatively, actual company performance that does not exceed forecasts is consistent with the hypothesis that buyout investors, public shareholders, and other potential buyers have access to the same information, and thus rules out the existence of asymmetric information. Kaplan (1989a) finds that approximately 37.5 and 28.0 per cent of the buyout companies meet their forecasted operating income in the first and second year after the buyout, respectively. Furthermore, he finds that actual operating income in those two years is roughly 20.7 and 25.8 per cent less than forecasted, which is significant at the 1 per cent level. These results suggest, although not prove, that PE investors and public shareholders have access to similar information. Ofek (1994) also studies US buyouts before the 1990s and finds results inconsistent with the hypothesis that efficiency gains in successful MBOs occur regardless of the transaction, and that the buyout is motivated by private information of managers when they bid for the firm in an MBO.

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Second, some researchers argue that it is unlikely that operating improvements of buyout companies are simply the result of inside information of incumbent management, as PE firms frequently bring in new management (Kaplan & Strömberg, 2009). Acharya et al. (2011) confirm this as one-third of the CEOs of their sample companies are replaced within 100 days after the buyout and two-thirds within four years. It is therefore highly unsure for incumbent management whether they will receive high-powered incentives from the new PE owners.

Third, proponents of the “bright side” view argue that the global economy has experienced boom-and-bust cycles, during which it is possible that PE firms have overpaid in their LBOs and experienced losses (Kaplan & Strömberg, 2009). Good examples are the late 1980s and the tail end of the PE boom in 2006 and early 2007, since it is likely that higher returns were initially expected than eventually achieved. If incumbent management provided inside information, it could not prevent the periods of poor returns for PE funds.

However, there also exists some empirical evidence showing that PE funds are able to acquire firms for less money compared to other potential buyers, which might suggest that PE funds successfully identify companies or industries that turn out to be undervalued ex-post (Kaplan & Strömberg, 2009). If this is indeed the case, it is likely that PE funds have superior information to public shareholders and other potential buyers, thus supporting the “dark side” view. Guo et al. (2008) suggest this with their research by showing that PE firms are able to buy low and sell high. They namely find that post-1980s public-to-private buyout companies experience only modest increases in operating performance, while generating large financial returns to PE funds. Similary, Bargeron, Schlingemann, Stulz, and Zutter (2008) study US acquisitions between 1990-2005 and find that target shareholders receive on average 55 per cent more if a public firm instead of a PE fund makes the acquisition. An alternative explanation for these findings might be that PE firms are particularly good negotiators and/or target shareholders do not receive the highest possible price in these acquisitions (Kaplan & Strömberg, 2009).

2.3.5 Market Timing

Finally, the “dark side” view argues that high variation in the speed and pattern of PE commitments and transactions over recent decades suggest that market timing supposedly plays an important role in overall PE fund performance (Ljungqvist & Richardson, 2003; Nowak, Schmidt, & Knigge, 2004). According to supporters of the “dark side” view this hypothesis holds even though portfolio composition decisions are made less frequently and PE funds do not invest in publicly traded assets (Nowak, Schmidt, & Knigge, 2004).

First, Ljungqvist and Richardson (2003) use a dataset derived from records of one of the largest US institutional investors in PE at the time, for which they estimate the determinants of the draw down and exit decisions of investments, while controlling for fund characteristics and market conditions. They find that competitive environment plays an important role in how fund

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managers manage their investments. Their results indicate that PE funds invest their capital and exit their investments more quickly during periods in which investment opportunities are good, leading to better returns on investments. Alternatively, the opposite appears to occur during competitive times when PE firms face greater competition from other funds. During those times, Ljungqvist and Richardson (2003) find that fund managers draw down their capital more slowly and have longer holding periods for their investments, leading to lower returns. Finally they conclude that, when assuming imperfectly competitive markets with varying demand for PE and sticky supply of PE in the short run, PE funds should earn excess returns when they are able to take advantage of these sticky capital markets. Furthermore, remaining investors should earn normal risk-adjusted rates of return, while investors who provide capital during overheated environments should earn poor returns.

Nowak, Schmidt, and Knigge (2004) also research whether market timing matters for PE investments. They specifically investigate the market timing of PE fund managers, meaning deal-by-deal investment timing abilities of those managers within a funds’ lifetime. By using detailed cash flow information of PE funds, they find that investment timing has an impact on the performance of venture capital (VC) funds, while divestment timing appears to have no such impact. They find different results for later-staged buyout funds, as performance of such funds appear not to be driven by market timing. According to Nowak et al. (2004), later-staged buyout funds are significantly related to the experience of individual fund managers. Consequently, they conclude that the success of investing into more mature portfolio companies increases when getting access to better deal flow and managing the investment.

Finally, another important question concerning the influence of market timing on the performance of buyout companies includes whether transactions during periods of high activity perform better or worse than PE transactions conducted in times of low activity (Sommer, 2012). However, the empirical findings on this topic are contradictionary. Some scholars, including Kaplan and Schoar (2005), Acharya et al. (2007) and Lerner et al. (2011), report a negative relationship between buyout company performance and PE investment activity, while Gompers, Kovner, and Lerner (2009) find a positive relationship. If it is indeed true that transactions conducted during booms outperform those made during a slump, PE firms will choose to invest heavily during certain times as that would result in more promising investment opportunities. This would imply that market timing of PE firms influences the operating performance of their buyout companies.

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3. RELATED LITERATURE AND HYPOTHESES

This chapter provides a more in-depth literature review, covering solely new perspectives on PE and its impact on financially distressed portfolio companies. This is important as the research aims to further elaborate on this topic, therefore requiring prior study results to formulate hypotheses. The first section discusses all studies on financial distress of PE-backed firms relative to non PE-backed firms. The section thereafter covers the three hypotheses of this research on the impact of PE on financial distress, operating profitability, and economic efficiency.

3.1 Private Equity Backed Firms and Financial Distress

As discussed in the general literature review, many scholars supporting the “bright side” view identify positive effects of PE buyouts, but there are also studies that rule in favour of the “dark side” view. Since PE transactions are always financed with a high percentage of leverage and both successes and failures of PE buyouts are known, especially the real impact of this high leverage is questioned. Obviously, the “bright side” emphasises the disciplining role of high leverage, while supporters of the “dark side” view stress the negative consequences of the use of leverage. These different views form the basis of a new discussion, questioning whether PE firms contribute to excessive company defaults and high deadweight costs of financial distress in the economy (Hotchkiss et al., 2014). According to the “bright side” view, PE-backed companies experience a comparative advantage relative to non PE-backed firms in resolving financial distress, leading to lower ex post costs of distress (Hotchkiss et al., 2014). On the contrary, the “dark side” hypothesis states that PE firms have little incentive to support financially distressed portfolio companies, for example when they already received their required investment returns by paying themselves a large, debt-financed dividend (Hotchkiss et al., 2014). When this argument holds, PE-backed companies would experience more difficulties when resolving from financial distress, leading to higher ex-post costs (Hotchkiss et al., 2014). This section further elaborates on both the “dark side” and the “bright side” views on the impact of PE on financial distress.

First, proponents of the “dark side” view argue that PE firms incline to use excessive leverage in their buyouts, especially during prosperous times for credit markets and times of high PE activity (Hotchkiss et al., 2014). Kaplan and Stein (1993) are the first to research the evolution of buyout pricing and financial structure and find that many PE buyouts from the late 1980s involving excessive amounts of leverage experience financial distress. More recently, Axelson et al. (2013) use a sample of international buyouts from 1980-2008 to research the determinants of financial structure of these transactions and compare their capital structure to a matched sample of public companies. The results indicate that PE buyout leverage levels are largely unrelated to cross-sectional factors that drive public firm leverage and instead are primarily driven by variation in economy-wide credit conditions. In addition, they show that the price and availability

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of debt is most important, suggesting that PE buyouts are more leveraged when credit is abundant and cheap. Furthermore, Axelson et al. (2013) provide evidence that transaction level leverage is associated with higher transaction prices and negatively related to fund-level returns, indicating that PE firms overpay when access to credit is relatively easier. Additionally, they argue that problems between PE fund managers and limited partners are one of the reasons for this excessive use of leverage in PE buyouts. PE fund managers have limited liability and hold an option-like carry contract on fund returns, which stimulates them to overinvest and potentially gamble by taking large levered stakes in buyouts, since they benefit from the upside, while the limited partners bear most of the downside risk. These findings raised the concern that PE funds use too much leverage for their buyouts, beyond what would be optimal for maximising firm value, e.g. given a trade-off between tax and incentive benefits of leverage against the costs of financial distress (Hotchkiss et al., 2014). This could lead to disproportionate company defaults and high financial distress costs among PE buyout companies versus non PE-backed companies.

Studies in favour of the “dark side” view furthermore point out that short-termism of PE fund managers causes these excessive leverage levels for buyouts and associated high costs of financial distress (Hotchkiss et al., 2014). A possible explanation for this is the limited investment horizon of PE funds caused by their limited lifetime of usually ten to twelve years, during which the funds need to make investments, exit them, and pay the proceeds back to the limited partners (Hotchkiss et al., 2014). This raises the concern that PE funds focus on short-term profits at the expense of long-term value. However, the empirical evidence for this PE short-termism argument is scant, even though its popularity in the media. Lerner et al. (2011) research one form of long-term activity, namely investments in innovation as measured by patenting activity, and find that PE-owned companies make more efficient long-term investments in innovation. Harford and Kolasinksi (2014) also present evidence inconsistent with short-termism, as they find that public companies benefit when they buy PE portfolio companies due to positive abnormal returns upon the transaction announcement, as well as abnormal returns different form zero in the long-run. Likewise, Cao and Lerner (2009) find that IPOs of PE-backed companies outperform those of non PE-backed companies, and thus also report findings inconsistent with PE short-termism.

Finally, proponents of the “dark side” view argue that the excessive risk-taking and short-termism of PE fund managers increase the probability of financial distress of buyout companies relative to other companies (Hotchkiss et al., 2014). Furthermore, once a company enters into financial distress, the “dark side” story suggests that PE-backed companies receive less support from their PE shareholders compared to companies owned by other shareholders, in terms of capital injections and assistance in negotiations with creditors for company restructuring (Hotchkiss et al., 2014). They provide lack of incentive by PE owners as a reason for this difference, caused by dividend recapitalisations that cover all of the funds’ initial investment or asset sales that reap short-term profits (Hotchkiss et al., 2014). This should lead to PE-backed

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companies experiencing excessive defaults and higher costs of financial distress compared to non PE-backed companies following their struggle under high debt loads without any support.

In contrast, proponents of the “bright side” view argue that PE funds are better in managing financial distress compared to non PE owners and can therefore optimally rely on more leverage in their buyout companies (Hotchkiss et al., 2014). Jensen (1989) started to support this view, and several academics after him, by showing that the PE ownership model is a superior form of corporate governance, due to its concentrated ownership, strong incentives to managers and employees, and high leverage. According to this view, high leverage does not form a threat for financial distress, but instead forces management to handle operational problems earlier and more forcefully than they would have done in a situation without debt repayment obligations (Hotchkiss et al., 2014). The difference with non PE-backed firms is that management would not voluntary take on enough debt because of weaker corporate governance, and could therefore not benefit as much from leverage as PE-backed firms do.

Moreover, Hotchkiss et al. (2014) show that PE-backed firms restructure differently from non PE-backed firms when in distress. First, they argue that PE-backed companies restructure more often outside of bankruptcy court, through consensual agreements or pre-packaged bankruptcy agreements. In fact, they find statistically significant empirical results, reporting that 52 per cent of all PE-backed companies restructure entirely out of court or through a pre-pack, while 64 per cent of all non PE-backed companies restructure in bankruptcy court via a traditional “free-fall” Chapter 11 filling. Second, Hotchkiss et al. (2014) find that PE-backed companies restructure more quickly than non PE-backed companies when they experience financial distress. More specifically, they report that the median distressed PE-backed company moves through its restructuring in 4.2 months faster compared to non PE-backed firms. When only considering “free-fall” Chapter 11 reorganisations, PE-backed companies restructure approximately three months faster. Lastly, distressed PE- and non PE-backed companies exit their restructurings differently. Hotchkiss et al. (2014) show that PE-backed companies exit restructurings more frequently as a viable independent entity, while liquidation occurs less frequently.

Furthermore, Hotchkiss et al. (2014) support the “bright side” view by pointing out that PE owners can use locked-in capital from undrawn commitments left in their fund to support distressed portfolio companies and make it easier to strike a deal with lenders. However, this does not apply for non PE-backed distressed firms, as they often have to raise expensive external capital that includes adverse selection costs associated with acquiring funds from asymmetrically informed investors (Myers & Majluf, 1984). Moreover, PE portfolio firms can use the locked-in capital when they have a relatively small amount of capital left, even if they do not experience financial distress yet (Hotchkiss et al., 2014). The extra amount of capital left in PE funds thus provides an opportunity to increase the debt capacity for all PE portfolio firms. In addition, Hotchkiss et al. (2014) show that prior to a default, 29 per cent of PE-backed firms receive some

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sort of capital injection, while this is only 18 per cent for non PE-backed firms. Companies that receive a capital injection resolve their distress out of court or through a pre-pack and restructure faster than companies without capital injections. Hotchkiss et al. (2014) conclude that these findings suggest that the ability of PE to inject capital in distressed portfolio companies prior to defaults partly explains the efficiency advantage of PE-backed companies during a restructuring.

Another argument in favour of the “bright side” view concerns the reputation of PE firms with lenders and possibly other stakeholders. Since PE firms are repeat players in the transaction market, large credit losses in connection with distressed portfolio companies will have a bad influence on the reputation of PE firms, leading to difficulties for new buyouts to acquire loans. Demiroglu and James (2010) confirm the reputation hypothesis by showing that more reputable PE investors pay lower loan rates and are able to obtain higher leverage, thus suggesting that PE reputation is related to LBO financing structure. Their results show that this is not only because reputable PE firms are more likely to take advantage of mispricing in credit markets, but also because agency costs of LBO debt can be reduced when a PE firm has a good reputation. Similarly, Ivashina and Kovner (2011) find that long-term relationships between PE firms and banks could reduce interest rates and provide loans with more favourable covenants due to reduced inefficiencies from information asymmetry. Hence, the reputational capital of PE funds can be damaged when a portfolio company becomes distressed, as this leads to unnecessarily large credit losses. This explains the incentive difference between PE funds and other owners to avoid defaults and to make a default less costly to banks and other lenders in case it occurs.

Proponents of PE also argue that unique skills enable PE investors to better manage firms in financial distress (Hotchkiss et al., 2014). These unique skills should be developed over the years, since PE firms probably have experienced financial distress in their portfolio companies before, as well as the accompanied restructuring process. However, what these unique skills exactly entail is not really known. Additionally, besides to traditional buyout funds, many PE firms are also known for their funds specialised in distressed investments (Hotchkiss et al., 2014). The knowledge PE firms acquire from their distressed investment practice will also allow them to manage distress portfolio companies more efficiently.

Finally, the “bright side” story predicts that, conditional on leverage, the probability that PE-backed companies become financially distressed is not higher than for other firms, and possibly even lower (Hotchkiss et al., 2014). Kaplan and Strömberg (2009) show this with their research on worldwide PE-backed transactions that occurred between 1970 and 2007. For the total sample, they report a bankruptcy and reorganisation rate of 6 per cent, and 7 per cent when excluding LBOs occurring after 2002. When assuming an average holding period of six years, this results in an annual default rate of 1.2 per cent, which appears to be lower than the average default rate of 1.6 per cent reported by Moody’s for all US corporate bond issuers during 1980 and 2002 (Kaplan & Strömberg, 2009). However, they argue that possibly not all cases of distress

The impact of private equity ownership on financial distress recovery

Financial Distress Recovery

Master’s Thesis Finance – 14 July 2016

M.L.M. Wouters

STATEMENT OF ORIGINALITY

The Impact of Private Equity Ownership on Financial Distress

Recovery

M.L.M. Wouters

University of Amsterdam, Amsterdam Business School, The Netherlands

Abstract

JEL Classification: G20

G24

G34

Keywords: Private Equity

Buyout

Leverage

Performance

Financial Distress

M.L.M. Wouters

Amsterdam Business School

Vechtstraat 132-3

Plantage Muidergracht 12

PREFACE AND ACKNOWLEDGEMENTS

TABLE OF CONTENTS

1. INTRODUCTION

2. GENERAL LITERATURE REVIEW

2.1 Private Equity Firms and Funds

2.2 Private Equity Buyouts

2.3 Private Equity Backed Firm Performance

3. RELATED LITERATURE AND HYPOTHESES

3.1 Private Equity Backed Firms and Financial Distress