Private Equity and Financial Fragility during the Crisis

Does private equity (PE) contribute to financial fragility during economic crises? Academics and regulators have worried that the proliferation of poorly structured transactions during booms may increase the vulnerability of the economy to downturns. During the 2008 financial crisis, we find PE-backed companies decreased investments less than their peers, while experiencing greater equity and debt inflows. The effects are stronger among financially constrained companies and those whose PE investors had more resources at the onset of the crisis. PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis. In a large-scale survey, we find that private equity firms were active investors during the crisis, spending more time with their portfolio companies to address operational and financial considerations.