Key Takeaways
- • Leveraged buyouts increase bankruptcy probability tenfold: companies acquired through LBOs experience a 20% bankruptcy rate within ten years versus a 2% rate for comparable publicly traded firms, according to California Polytechnic State University researchers Brian Ayash and Mahdi Rastad.
- • Research sample covered 467 LBO transactions of $50 million or more involving U.S. publicly traded companies between January 1, 1980, and December 31, 2006, providing robust longitudinal evidence across multiple economic cycles.
- • Retail trade and construction sectors show highest bankruptcy vulnerability post-LBO, with failure rates reaching approximately one in three, compared to wholesale trade and finance sectors with lower distress rates.
- • Political pressure mounting on private equity practices: Senator Elizabeth Warren released a policy plan in July 2019 proposing to hold PE firms financially liable for portfolio company debts and modify bankruptcy rules to address LBO-related risks.
- • Worker displacement concerns validated by parallel research: private equity stakeholder groups documented 1.3 million jobs lost over ten years directly and indirectly attributable to PE-backed transactions.
Summary
New academic research published by California Polytechnic State University has quantified a stark disparity in bankruptcy outcomes between leveraged buyout-acquired companies and their publicly traded peers. The study, conducted by researchers Brian Ayash and Mahdi Rastad, tracked 467 LBO transactions valued at $50 million or greater—involving U.S. publicly traded companies acquired between January 1, 1980, and December 31, 2006—against a control group of companies that remained public during the same period. The findings reveal that LBOs increase bankruptcy probability tenfold: approximately 20% of large PE-backed acquisitions go bankrupt within ten years, compared to only 2% in the control group.
The research underscores structural vulnerabilities in the leveraged buyout model. By definition, LBOs fund acquisitions primarily through debt rather than equity and cash, with acquired company assets serving as collateral. This capital structure amplifies financial distress risk, particularly during economic downturns or when operational performance deteriorates. Notably, retail trade and construction companies demonstrate the highest bankruptcy vulnerability post-LBO, with failure rates approximating one in three, while sectors such as wholesale trade and finance show relatively lower distress rates.
The timing of this research has intensified policy scrutiny. In July 2019, Democratic presidential candidate Senator Elizabeth Warren unveiled a plan to impose direct financial accountability on private equity firms by making them responsible for portfolio company debts and modifying existing bankruptcy rules. Concurrently, worker advocacy organizations including the Private Equity Stakeholder Project and the Center for Popular Democracy published research attributing 1.3 million job losses over the prior decade to private equity acquisitions and restructurings—both direct and indirect effects.
The California Polytechnic researchers emphasized the broader societal implications, noting that "the large number of recent high profile private equity-backed LBO bankruptcies" has made it increasingly difficult for policymakers to ignore LBO impacts on constituents and regional economies. This convergence of academic evidence, political activism, and job displacement data has elevated leveraged buyouts from a specialized finance mechanism to a subject of sustained regulatory and legislative attention.
The research underscores structural vulnerabilities in the leveraged buyout model. By definition, LBOs fund acquisitions primarily through debt rather than equity and cash, with acquired company assets serving as collateral. This capital structure amplifies financial distress risk, particularly during economic downturns or when operational performance deteriorates. Notably, retail trade and construction companies demonstrate the highest bankruptcy vulnerability post-LBO, with failure rates approximating one in three, while sectors such as wholesale trade and finance show relatively lower distress rates.
The timing of this research has intensified policy scrutiny. In July 2019, Democratic presidential candidate Senator Elizabeth Warren unveiled a plan to impose direct financial accountability on private equity firms by making them responsible for portfolio company debts and modifying existing bankruptcy rules. Concurrently, worker advocacy organizations including the Private Equity Stakeholder Project and the Center for Popular Democracy published research attributing 1.3 million job losses over the prior decade to private equity acquisitions and restructurings—both direct and indirect effects.
The California Polytechnic researchers emphasized the broader societal implications, noting that "the large number of recent high profile private equity-backed LBO bankruptcies" has made it increasingly difficult for policymakers to ignore LBO impacts on constituents and regional economies. This convergence of academic evidence, political activism, and job displacement data has elevated leveraged buyouts from a specialized finance mechanism to a subject of sustained regulatory and legislative attention.
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