Private Equity Underperforming Stock Markets
Private equity has on average underperformed the stock market in the last decade, according to a detailed survey of the buyout industry submitted to the European parliament yesterday, the Financial Times reports.
The stereotype of private equity cutting costs at companies and making colossal profits from selling them soon afterwards was undermined by the research, compiled by Olivier Gottschalg, an assistant professor of strategy at the HEC business school in Paris.
Based on data from 6,000 private equity deals and about 1,000 buyout funds, the survey shows that average private equity returns have underperformed the benchmark S&P 500 share index by 3%, after fees charged to investors.
So private equity is generating value somewhere, but its fee structure means the general partners capture double the out-performance they generate.
The research was based on data collected from investors in 852 private equity funds raised before 1993 to be sure they had sold all their assets. But Gottschalg who is also head of research at Peracs, an adviser to buyout investors, said analysis of more recent funds showed their performance had been similar.
On a more positive note for the industry, Mr Gottschalg said his research showed private equity firms were longer-term investors than many listed company shareholders. He also found they were more focused on growth than restructuring.
A comparison of buyouts completed in 1996 and big minority shareholders in a broad selection of public companies found that, after five years, 55% of private equity investors had sold out, against 88% of minority shareholders.
Gottschalg said a survey of 1,000 buy-out case studies found that 91% of private equity groups had growth initiatives at the companies they bought, against only 54% with restructuring initiatives.
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November 30th, 2007 at 12:45 pm
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