June 26, 2012
In an opinion piece posted on The New York Times DealBook blog, Richard Farley, partner in the corporate practice of Paul Hastings, explores attacks on the private equity industry during this election season despite the reality that private equity saves jobs in times of economic struggle.
Farley highlights data from a recently released Moody’s Investors Services report, which found that PE-backed companies default on their debt at a much lower rate than those companies not backed by private equity.
The Moody’s study reviewed more than a thousand situations going back to 1988 where companies defaulted on their debt. Two hundred involved companies that had undergone private equity-backed leveraged buyouts; the others had not. The results of this exhaustive study repudiate the “conventional wisdom” of the anti-Wall Street crowd that leveraged buyouts destroy companies and jobs.
Subsequently, Farley notes that PE-backed companies are liquidated at a much lower rate than their non-PE-backed peers.
Most surprisingly, if a private equity-owned company defaults on its debt, it is half as likely to be liquidated as its counterparts. The Moody’s report notes that “a much higher percentage of bankrupt LBOs were acquired or emerged from bankruptcy instead of being liquidated.” When companies are acquired or emerge from bankruptcy, jobs are much more likely to be preserved than when the enterprise is liquidated.
Farley points out that among the increasing political rhetoric, the debate over the role of private equity is “a debate worth hearing, given the importance of private equity in our economy.” Farley notes that the management experience and sophistication that private equity provides to companies, PE’s ability to quickly provide growth capital for struggling firms and the alignment of interests among employees and owners enable private equity firms to stick with troubled companies and save jobs in difficult times.
To read Richard Farley’s full post, click here.
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