When the going gets tough: Private equity firms' role as agents and the resolution of financial distress in buyouts

Abstract

Previous research has focused on a private equity (PE) firm’s role as principal in its relationship with the investee, but few studies have looked into their role as agents to their investors. We examine how a PE firm’s relationship as agent toward limited partners (LPs) and banks influences its incentives to resolve financial distress in the investee. We examine the effect of PE fundraising reputation, PE fundraising activity, and PE bank affiliation on the likelihood of a financially distressed buyout ending in bankruptcy. We build a unique dataset of 338 distressed buyouts in the UK to test our hypotheses.