The Rise of Private Equity Sponsors in the Management of Financial Distress: Lessons from the United States, Europe and Asia-Pacific

This article examines the promises, perils and challenges associated with the rise of private equity sponsors in the management of financial distress. Drawing on the legal and finance literature, as well as an analysis of high-profile cases from the United States, Europe and Asia-Pacific, we show that private equity sponsors reshape the management of financial distress in ways that can both enhance efficiency and generate or exacerbate conflicts that may destroy or opportunistically divert value at the expense of creditors or particular classes of creditors. Our comparative analysis reveals important cross-jurisdictional divergences in how private equity sponsors respond to financial distress. We argue that these differences can be explained, at least in part, by variations in legal and institutional environments, which shape sponsor behavior not only in insolvency proceedings but also in the period preceding financial distress. The article concludes by assessing whether existing insolvency and insolvency-related frameworks remain fit for purpose in this new era of capital markets and corporate finance, characterized by the rise of private markets and the growing role of private equity sponsors in the governance of firms, including those in financial distress, and proposes targeted reforms to address some of the distinctive risks posed by private equity-led insolvencies.