Private Equity – the Rescue or Destruction of Financially Distressed Investments

This paper investigates the effect PE-backing has on portfolio companies in financial distress. Inspired by the more recent questioning of the morality of the Private Equity industry, this paper analyzes the change in financial health after a PE buyout transaction and directly compares that of financially distressed firms during the same time period that were not PE-backed. This study utilizes a dataset made up of financially distressed, public US firms as of 2009, and assesses the change in Z-score ~10 years after PE investment to determine whether PE-backing has an effect on the change in financial health. The negative coefficient in the regression results suggest that PE-backing has a negative effect on difference in Z-score between 2009 and the last twelve months financials. However, these results are insignificant at the 90% and 95% confidence level and I am unable to conclude that PE backing hurts companies in financial distress in the general population. Limitations in the availability of data that resulted in a much larger sample of non-backed financially distressed firms than those that are PE-backed may have contributed to the insignificance of the results for this sample