Study shows that private equity’s leverage is a good thing when times get tough

A Northwestern study notes that debt during a recession can be a very bad thing. But it reveals much more about the role of private equity.

It seems leveraged companies with private equity backing can show success when times get tough.

Professor Filippo Mezzanotti of the Kellogg School of Management at Northwestern University has published a study. Its results show that leveraged companies with PE backers actually did much better than their peers during the Great Recession.

Having deep-pocketed private equity firms that still had lots of cash to invest were able to draw on financing that was unavailable form the banking system or Wall Street and were able to invest the dollars needed to keep the business running and growing when businesses without such backing found financing difficult if not impossible to secure.

Beyond the Northwestern Study

Mezzanoti and his co-authors Shai Bernstein of Stanford University and Josh Lerner of Harvard University examined the performance of companies in the United Kingdom during the recession. He chose the U.K. over the U.S. because British discourse laws made it easier to accumulate and study the data.

In interview with Kellogg Insight, the schools magazine, he said, “It’s like if you have rich parents and you lose your job, you can kind of isolate yourself from some of these costs in the short run because you can get money from them and they can help you figure a way out of your issue.”

Private equity came under fire during the recession for their use of leverage. However, the facts show this to not entirely be the case. In fact, these firms had lots of cash on hand. This fact gave them the ability to prop up their portfolio companies and protect the capital they had already invested in them.

Once again it would appear that the data slew the dragon that the media likes to put forth.