Global private equity watch 2013
Exits in brief
PE is sitting on a record number of unrealized investments, an aging portfolio that challenges the three- to five-year holding period that characterized the industry until the financial crisis.
Over the last two years, many firms have refinanced companies, giving them extra time to work with portfolio companies to generate value. However, the exit overhang must now be an overarching priority for all firms.
We estimate there are now more than 700 companies in PE portfolios in Europe acquired since 2004 that had an entry enterprise value (EV) of €150 million or more. In the US, there are nearly 600 companies that had an entry EV of US$150 million or more awaiting realization. On an aggregated basis, the entry EV of these US investments is over US$700 billion.
Working off the overhang
Addressing this glut will not be easy. IPO markets remain subdued, and corporations (particularly in Europe) have been cautious on acquisitions.
It remains to be seen if the large M&A deals announced in the first quarter of 2013 are a harbinger of greater activity. Improving credit markets in the US, and more recently in Europe, may help as PE is more able to acquire companies through secondary buyouts.
Regardless of market conditions, the impetus for an exit must come from the companies' current PE owners. One solution is reinvigorating businesses bought at the peak of the market, and many PE firms now have considerable operational resources to improve performance.
Indeed, our annual studies on how PE creates value demonstrate that PE is able to significantly improve areas such as productivity (up 6.9% on average across all European markets, according to our European study). Moreover, 45% of PE returns in Europe for exits to the end of 2011 and 57% in the US to the end of 2010 were attributable to value creation.
Double the pace
PE needs to at least double the current pace of exits, and exits must have equal importance to new deals within PE firms. PE must also find new ways of incentivizing management teams—particularly those operating in companies acquired at high valuations in the boom times—to focus on the exit.
The bottom line: PE will clear the backlog of exits that remains from the boom era only by making existing portfolio companies a top priority.