Office Hours
November 20, 2020

How Private Equity Funds Help Companies in Times of Distress

Nicolas Cole

Moonfare Office Hours is a recurring series of interviews in which Moonfare speaks with academics at leading universities around the world to discuss their research in the field of private equity.

In this first installment, we spoke with Alexander Belyakov from the Wharton School at the University of Pennsylvania.

Alex, thanks for speaking with us. How would you like to introduce yourself?

My name is Alex, and I am currently finishing my PhD at Wharton. I’m originally from Menzelinsk, which is a town of 20,000 people in Tatarstan.

I entered Wharton straight after I finished my undergraduate work at the New Economic School and Highest School of Economics in Moscow, Russia.

I would have finished my PhD by now if not for the pandemic, but that’s alright — it’s given me more time to research. Thanks for interviewing me, I always value the opportunity to tell more people about my research.

How would you summarise the key points of your last paper and doctoral thesis, “Economics of Leveraged Buyouts: Theory and Evidence from the UK Private Equity Industry“?

The paper shows that private equity owners increase the value of their portfolio companies by injecting additional equity in times of financial distress.

Because the managers of these companies know that they will be saved in the downside scenario, they invest more when times are good, and their companies grow faster.

To prove this point, I hand-collected and analyzed annual returns of a representative sample of private equity-backed companies in the UK, specifically focusing on the cash transfers between the funds and their portfolio companies.

While not the main point, I do show that private equity firms do not over-extract resources from portfolio companies. In particular, there is no evidence of the excessive fees that private equity owners allegedly charge their portfolio companies for advisory services.

Was there anything that surprised you about the results? Or were you more proving a hypothesis that you were confident about before?

Actually, most of the results were surprising. I started with a theoretical model, which predicted a lot of what I later observed in the data. At the time, however, most of my understanding was based on what I read in the media.

I did suspect there was some bias around private equity, but I did not expect the reality to be completely different from some of the public conversation.

Private equity-backed companies are not over-levered and private equity managers do not suck resources out of companies — that’s something that the data clearly shows, and I was not expecting it to be this stark.

What do you see as the next frontier in private equity research? Did any new questions come up from your research that you want to explore next?

My research shows that private equity funds increase the value of companies that they manage, but it says nothing about how that value is distributed among different stakeholders, such as GPs, LPs, banks, the government, workers, etc. [Note: GPs are general partners, or the private equity fund’s investment team; LPs are limited partners, or the institutions and individuals who invest their capital in the fund].

In other words, we know that the pie gets bigger, but does everyone get a bigger share of the pie, or does someone’s share actually shrink? I think that is the next logical step: understanding who does and does not benefit if a company is acquired by a private equity fund.

Do you have any sense about how Covid-19 changed the opportunity set and value creation strategies of buyout funds?

Unfortunately, my research does not say more about the Covid-19 crisis than it does about any other crisis. The paper shows that private equity owners help their portfolio companies in distress, and I believe a lot of companies need such help in 2020. At the same time, Covid-19 presents a lot of unique challenges to private firms and their portfolio companies, and my research says little about that.

How did you get interested in private equity research specifically? Was there any article, book etc you read that sparked your interest in the field?

At first, private equity was a good setting to test some of the theoretical models I developed about the optimal amount of debt a company should have. Those models showed that optimal leverage should strongly depend on whether there is someone who can save the company in case it falls in financial distress.

Once I started to look deeper into it, however, I realized that there was a lot we did not understand or simply misunderstood. I believe private equity as a research topic still remains under-explored. To achieve real progress academics and practitioners should come together.

Alexander Belyakov

Alexander Belyakov is finishing his PhD in the finance department at the University of Pennsylvania’s Wharton School. He plans to submit his thesis, “Economics of Leveraged Buyouts: Theory and Evidence from the UK Private Equity Industry to journals and for peer review later this year.

Nicolas Cole

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