Private Equity and Corporate Borrowing Constraints : Evidence from Loan Level Data

How do private equity (PE) investors affect firms' borrowing constraints, debt structure, and leverage dynamics? In this paper, we examine this central question by analyzing a large and novel database of PE-backed, bank-reliant, small and middle market firms in the U.S. using administrative firm-bank-loan level data. We show that PE owners improve cash flow pledgeability, thereby allowing firms to borrow against cash flow. Relative to comparable non PE-backed firms that primarily rely on asset-based debt, PE-backed firms use more cash flow-based debt, and exhibit a higher sensitivity of borrowing and investments to changes in earnings. We also find that PE owners inject equity and stabilize earnings under distress, two potential mechanisms explaining PE-backed firms' access to cash flow-based debt. We propose a simple theoretical framework to rationalize our results. Our findings have novel implications for our understanding of how PE investors affect firm policies, outcomes, and exposure to economic shocks