Study backs industry's value creation record

A survey of large buyouts in the US and Europe supports the private equity industry's claims of portfolio company out-performance.

Accountants Ernst & Young have published a survey that supports private equity’s claims that it increases the value of businesses it backs.

The annual rate of growth in enterprise value achieved last year by the largest private equity-backed businesses significantly outperformed equivalent public companies in the same country, industry sector and timeframe.
Average annual enterprise value growth rates were 33 percent in the US and 23 percent in Europe, compared with public company equivalents of 11 percent and 15 percent respectively.

These are the findings of How Do Private Equity Investors Create Value?, Ernst & Young’s second annual study on the business performance and strategies of private equity firms across the largest deals exited throughout 2006.

The study emphasised how the industry is consistently able to grow and strengthen the companies under its ownership. The average enterprise value of the businesses studied in the US grew from $1.2 billion when acquired to $2.2 billion at exit. In Europe, the average value grew from $800 million to $1.5 billion at exit.

Employment levels were the same, or higher, at exit versus entry in 80 percent of US deals. In Europe, employment in businesses owned by buyout firms grew by an average of 5 percent per annum across the UK, France and Germany, where two-thirds of the deals took place, compared to 3 percent for equivalent public company benchmarks.

Simon Perry, global private equity leader at Ernst & Young, said: “Two-thirds of the earnings growth in private equity-owned companies comes from business expansion, with increases in organic revenue being the most significant element.”

This includes the benefits of investment in sales and marketing, new product launches, acquisitions, investment into attractive industry sectors in the US, and expansion into new geographies in Europe.

Cost reduction, including operational efficiencies, is also a very important element of earnings growth in both the US and Europe, accounting for 23 percent and 31 percent respectively of the total growth in earnings.

The study showed that private equity managers are highly selective and well researched when making the decision to buy a business, and have the ability to drive efficiencies through the business plan under their ownership.

Perry said: “Across almost all deals and ownership strategies, private equity investors were actively involved in the business after acquisition, making rapid decisions alongside management, challenging progress and making available specialist expertise.” This meant the intensity of engagement between private equity investors and management was often stronger than under the previous owners, he said.

Recent developments in the credit markets may have cast a long shadow, Perry conceded, but he remained upbeat about the prospects for the industry.