The PEC Doth Protest Too Much?

The Private Equity Council last week released a 27-page study addressing the great question of whether private equity destroys value. What do you think the PEC, an advocacy group for private equity firms, concluded?

PEC determined that private equity-backed companies are not more likely to default than other companies, which differs from conclusions reached in recent reports from S&P, Moody’s and even Bain & Company. The trade group even goes so far as to put the term “overleveraged” in quote marks. As if there isn’t such a thing as too much leverage!

But really, the PEC does make a few valid points. First, I think the record has been set straight about the BCG report from late 2008, which famously stated half of all PE-backed companies could default based on where their debt was trading, and concluded that 40% of all private equity firms could disappear in a great “shake-out.” Although it somehow manages to earn a mention at every conference I’ve been to since its release, I think I can safely say not many in the industry, peHUB included, took it very seriously. (In fact, I hereby declare this site a BCG-“shake-out”-report-free zone.)

Likewise, an S&P report from 2009 sloppily stated 61% of all defaults were private equity-related was promptly, and correctly, refuted by the PEC and other media publications. Maybe last week’s Moody’s report, attributing half of all defaults to PE firms, put the PEC over the edge. Either way, the PEC is determined to come up with an exact default rate for PE-backed companies. Using peHUB data, Dow Jones data and its own study, the PEC determines that the annual default rate for private equity firms in 2008 and 2009 was 2.84%. From there the report delves into a detail analysis of private equity reports from Moody’s, BCG and S&P.

I’m not sure this elaborate of a study was necessary, but perhaps the PEC wants to end the conversation once and for all. Sorry to break it to you, but the debate will likely rage on until the end of most of our careers. To read private equity’s side, download it here:

PEC_Default Rate Study – 03-31-10 – FINAL.


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