Private Equity Transaction Bankruptcy Risk Prediction

This study utilizes a sample of private equity backed acquisitions to test whether certain factors, evaluated and quantified on the date of transaction completion, serve as indicators of future transaction bankruptcy. The results of this paper suggest that the effective federal funds rate is significantly and positively correlated with the bankruptcy of private equity backed transactions. Other measured factors specific to the private equity sponsor, the target firm in the acquisition and the characteristics of the transaction are found to be insignificant. Analysis on the influence of these factors is performed using two types of binary-response models, which predict the likelihood of the occurrence of bankruptcy, and a matched sample model that tests for the difference of means between a non-bankrupt transaction group and a bankrupt transaction group. Limitations in the availability of data derived from the private nature of the industry resulted in a limited sample size of 259 transactions completed from 1989 to 2008. General insignificance in the results of this study merits further analysis on the contributing factors to private equity transaction failure.