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Private equity and financial stability

  • Gregory, David

    ()

    (Bank of England)

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    In the mid-2000s, there was a dramatic increase in acquisitions of UK companies by private equity funds. The leverage on these buyouts, especially the larger ones, was high. The resulting increase in indebtedness makes those companies more susceptible to default, exposing their lenders to potential losses. This risk is compounded by the need for companies to refinance a cluster of buyout debt maturing over the next few years in an environment of much tighter credit conditions. From a macroprudential policy perspective it will be important to monitor the use of debt in acquisitions in future episodes of exuberance. But there is also a potential role for private equity to play in promoting recovery in a downswing, in particular at the current juncture, by restructuring companies in difficulty.

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    File URL: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130104.pdf
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    Article provided by Bank of England in its journal Bank of England Quarterly Bulletin.

    Volume (Year): 53 (2013)
    Issue (Month): 1 ()
    Pages: 38-47

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    Handle: RePEc:boe:qbullt:0096
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    1. Josh Lerner & Morten Sorensen & Per Strömberg, 2011. "Private Equity and Long‐Run Investment: The Case of Innovation," Journal of Finance, American Finance Association, vol. 66(2), pages 445-477, 04.
    2. Axelson, Ulf & Stromberg, Per & Weisbach, Michael S., 2008. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Working Paper Series 2008-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Ludovic Phalippou & Oliver Gottschalg, 2009. "The Performance of Private Equity Funds," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1747-1776, April.
    4. Steven Davis & John Haltiwanger & Ron Jarmin & Josh Lerner & Javier Miranda, 2008. "Private Equity and Employment," Working Papers 08-07r, Center for Economic Studies, U.S. Census Bureau, revised Oct 2011.
    5. Ulf Axelson & Tim Jenkinson & Per Strömberg & Michael S. Weisbach, 2012. "Borrow cheap, buy high?: the determinants of leverage and pricing in buyouts," LSE Research Online Documents on Economics 43088, London School of Economics and Political Science, LSE Library.
    6. Gregor Andrade & Steven N. Kaplan, 1997. "How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," NBER Working Papers 6145, National Bureau of Economic Research, Inc.
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