Private Equity: The Cause of, and Solution to, All of Life’s Problems
A new Moody’s default report reveals a troubling paradox: Private equity-sponsored companies are more likely to default, yet they’re also more likely to recover from default. It’s a leveraged catch-22. The argument is that because of private equity’s appetite for leverage and dividends, their portfolio companies are generally at higher risk. No surprise there. Most PE-backed companies receive a B1 corporate family rating after their LBO -- indicating high leverage tolerance and relatively low default rates -- but a number of LBO-backed companies didn’t maintain that B1 rating very deep into the recession. Moody’s data blames half of all corporate defaults in 2009 on private equity. But the report counters that creditors of private equity-backed companies may realize better recoveries than those that lend to strategically owned companies. The idea is that private equity firms are so focused on preserving their equity that they’re more willing to get creative when a portfolio company gets in trouble. That means distressed exchanges and pre-pack bankruptcies.
