You do not need an MBA from Wharton to know that loading up companies with debt will lead to bankruptcy. Research shows that private equity funds acquire healthy firms and increase their probability of defaultby a factor of 10. They are the antithesis of conservative management.
The argument
Recent studies show that default rates are 10 times higher for private equity companies. "Tracking a sample of 484 public to private LBOs for 10 years after going private, we find a bankruptcy rate of approximately 20%, an order of magnitude greater than the 2% bankruptcy rate for the control sample. Our analysis is robust to macro and industry shocks as potential driving forces behind bankruptcy. " https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423290
Premises
Counter-arguments
A single study's default figure does not settle the economic question. Higher bankruptcy rates among leveraged buyouts are partly a selection effect: private equity often acquires underperforming, distressed or cyclical firms and deliberately employs leverage, so a raised default rate reflects the risk profile of what PE takes on, not simply harm it causes — the relevant comparison is against how those firms would have fared unbought, which a control sample of all non-LBO firms does not capture. Default counts are also not a measure of net economic value: the literature on private equity is genuinely mixed, with some studies finding productivity and efficiency gains at acquired firms and roughly neutral net employment effects alongside the higher failure rate, so one metric cannot support the sweeping 'bad for the economy' conclusion. Even accepting the 20%-versus-2% finding, it shows leveraged buyouts fail more often — a real cost concentrated on workers and creditors when they do — without showing the aggregate effect on the economy is negative, which is what the position claims.
Rejecting the premises
[Rejecting P2] A higher LBO default rate partly reflects selection — PE often buys riskier, distressed firms — so comparison against all non-LBO firms overstates PE's causal contribution to failure. [Rejecting C] Default frequency is not a measure of net economic value; the mixed evidence on productivity and employment means higher failures alone do not establish PE is bad for the economy.
Further reading
Here is a very good study. Leveraged Buyouts and Financial Distress Brian Ayash, California State Polytechnic University, San Luis Obispo - Finance Area Mahdi Rastad, Orfalea College of Business, California State Polytechnic University https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423290