Do private equity investors trigger financial distress in their portfolio companies?

There is some controversy on the key sources of success in the private equity model and on how this business model affects the portfolio companies. We investigate operating performance and financial constraints of European companies around the buyout event in the period between 2000 and 2008. In addition, we analyze whether these companies go bankrupt more often than comparable non-buyout companies. Our paper suggests that private equity investors select companies which are less financially constrained than comparable companies and that financial constraints tighten after the buyout. This is true in particular for stand-alone transactions and in times in which cheap debt financing is available. Despite tighter financial constraints, private equity-backed companies do not suffer from higher mortality rates, unless they are backed by inexperienced private equity funds. Finally, we find only modest effects of private equity investors on changes in the companies’ operating performance.