Private Equity Businesses Outperforming Public Companies
Large Private Equity-backed businesses are significantly outperforming equivalent public companies, a new survey from Ernst & Young shows. The annual rate of growth in enterprise value (EV) achieved last year by the largest PE-backed firms was 33% in the US and 23% in Europe, compared to public company equivalents of 11% and 15% respectively.
This one of the key findings of “How Do Private Equity Investors Create Value?” — the second annual E&Y study of the business performance and strategies of PE firms, which examined the largest deals exited throughout 2006.
The study emphasizes how the PE 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.
Despite public comment that Private Equity ownership is synonymous with short-term cost-cutting, the study shows the bulk of growth coming from organic revenue growth, and acquisitions.
Cost reduction is the third most important element, but employment levels remained the same, or higher, at exit versus entry in 80% of US deals and 60% of European deals. In Europe employment in businesses owned by PE grew by an average of 5% per annum across the UK, France and Germany, where two-thirds of the deals took place, compared to 3% for equivalent public company benchmarks.
The study shows that Private Equity investors are highly selective and well researched when making the decision to buy a business and have the ability to drive real efficiencies through the business plan under their ownership. This finding was true across deals in the US and all main European countries.
E&Y notes that recent credit market squeeze may prompt a more conservative approach with an increasing need for due diligence at acquisition. In Europe, a key challenge will be developing alternative exit routes alongside secondary sales. However, market participants view this as a short term dip in activity prior to returning to a more rational climate in 2008.
There is widespread solid belief in the PE model and the long-term fundamentals remain strong.
The full report is available at no charge through E&Y’s website (registration required).
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October 9th, 2007 at 9:10 am
[...] More good news for the PE sector came in at Number 3: Private Equity Businesses Outperforming Public Companies. [...]