Private equity uses significantly less leverage today than 15 years ago. Average loan-to-value on new private equity investments was 53 percent in 2020, down from 68 percent in 2005. This decline in debt financing undercuts some mischaracterizations about how the industry uses borrowed capital.
Importantly, private equity owned companies that do borrow capital, default at a far lower rate than other corporate borrowers. According to S&P Leveraged Commentary Data, loans to businesses owned by private equity in 2020 defaulted at less than half the rate of loans to other non-investment grade public and private companies. This data underscores how private equity firms and their portfolio companies borrow capital responsibly and how private equity firms can help their portfolio companies effectively manage cash flow, particularly through challenging periods.
Credit is critical to ensuring a dynamic and growing economy. Private credit is a growing and increasingly mainstream source of funding for companies of all sizes and sectors. For example, fast growing sectors like cloud-based software and renewable energy may not have access to traditional bank lending. Private credit providers take a long-term view and understand the industry transformation underway and can provide valuable access to capital for these companies.
The latest data on the industry’s use of credit shows that private equity firms use significantly less leverage than they did 15 years ago and businesses owned by private equity are borrowing responsibly. Access to credit is critical to ensuring a growing economy.