Private equity value creation in North America
Our seventh study of value creation in North America highlights the flexibility of the PE model and its ability to generate outperformance throughout an economic cycle – most recently from pre-crisis through the downturn and now into recovery.
The outperformance over comparable public markets is dramatic. In our sample of exits between 2006 and 2013, PE returned 2.4x over similar publicly listed companies, with PE’s strategic and operational expertise playing a key role.
As exits increase, PE can exhale
Exits numbers and values by entry enterprise value (EV) were the highest in 2013 since our studies began, at 169 and US$203b respectively. The entry EV of the North American PE portfolio was US$659b in 2013, compared with a peak of approximately US$870b in 2008.
This acceleration of exits is helping PE move rapidly out of the danger zone of recent years. Until last year, the rate of exits had been insufficient to achieve liquidity within the standard PE ownership time frame – with an inevitable drag on returns.
PE exits compare well versus public companies
Gross weighted average equity multiple attribution, 2006-13
Larger, pre-crisis deals now being realized
The IPO window remained open in 2013, and PE took the opportunity to exit some of its largest companies acquired in the run-up to the crisis.
Other exit routes were also open to PE for bigger deals, a very encouraging sign. Exits of large companies via M&A (to strategics and PE) were up significantly in 2013. Corporates were also more active in the M&A market last year, a notable change from prior years.
PE is clearly taking advantage of the IPO and M&A trends, exiting to provide liquidity to LPs within a more typical time frame.
Market validates PE’s long-term approach
Post-crisis, PE struggled to regain value lost in deals during the downturn. Yet many of these deals have recovered to the point where they can be profitably exited. Indeed, the factor most cited by PE as the trigger for exits in 2013 was favorable market conditions.
This underscores the benefits of PE’s long-term investment approach. Although the portfolio was clearly affected by the recession, PE’s ability to ride out the storm while rigorously repositioning operations and driving growth has crystallized in successful exits.
7 other key findings
Growth drivers are varied
Organic revenue growth remains the predominant driver of EBITDA growth, but other drivers are shifting. The importance of cost-cutting has declined, while the use of buy-and-build strategies has increased.
Buy-and-build strategies are back
Buy-and-build strategies were associated with nearly one-third of deals exited in 2013. PE is clearly taking advantage of conditions in the post-crisis period to use its M&A expertise to build companies of greater scale with add-on acquisitions.
EBITDA growth outpaces comparable public companies
Driven by organic revenue growth and buy-and-build strategies, PE-backed companies have expanded EBITDA by 12.9% in the last three years, about twice the rate of comparable public companies. Since 2006, the outperformance is even more pronounced.
Focus on management intensifies
The importance of management in driving improvements in an enduring feature of our value creation studies, and 2013 was no exception. Having the right management team from the outset, one whose tenure spans the investment cycle, closely correlates with above-average returns.
Incentive programs increase
Since the onset of the crisis, PE has adjusted its equity incentive programs by focusing on senior team members, who are arguably the individuals most able to drive improvements and business transformation.
Management-centric models become more prevalent
A bifurcation is emerging between firms that adopt some form of the operating partner model and those that pursue a strategy more closely aligned with management team autonomy.
Our analysis suggests that time spent working directly with portfolio companies has a positive effect on performance—although there will never be a one-size-fits-all approach to portfolio management.
Large IPOs squeeze liquidity
Market conditions in 2013 allowed more exits via IPO, but there are consequences to this type of realization. It increases PE’s exposure to public market volatility and translates into longer waiting periods for distributions.