The average entry enterprise value for exits by IPO in 2010, at over €2.5b, is almost double the previous high of 2007.
What 2010 exits reveal
Our 2010 study shows that exit activity increased substantially from the previous two years and on some measures was close to the peak of 2006–07. PE was able to take advantage of an improved economic outlook in 2010, stronger capital markets activity and a renewed confidence among PE investors to acquire high quality businesses.
This reinforces one of our findings from last year’s study — that the PE model offers protection against short-term risks and allows firms to choose the best time to exit their investments. Our analysis also points to a steady recovery in activity levels following the challenging years of 2008 and 2009.
PE exits 2005–2010, N and entry EV
There were 57 exits in 2010, a sharp rise from 2009 and 2008. The return of IPOs was one of the main drivers, as a total of 11 portfolio companies exited via IPO across Europe — the highest number since 2006.
IPOs make a comeback
Exits via IPO also accounted for some of the largest companies in PE portfolios by entry EV: 19% of exits by number were by IPO, while 56% by entry EV were by IPO. Indeed, the average entry EV for exits by IPO in 2010, at over €2.5b, is almost double the previous high of 2007.
This demonstrates that public markets have been a key route to realizing large portfolio companies, with 2010 a particularly strong year. Over half of the IPO exits for the 2005 — 2010 period with an entry EV of more than €1b took place in 2010. However, none of them were in the UK, demonstrating a continued distrust of PE-backed IPOs in this investment community.
Percentage of PE exits by IPO, by entry EV range, 2005 -10
Creditor exits declined sharply
Another positive note was the sharp reduction in the number and proportion of creditor exits from 2009 to 2010. Looking back over the six-year period of our study, creditor exits accounted for 6% of the total — far less than was anticipated when the crisis began.
It should also be noted that the vast majority of these creditor exits were a change of equity ownership triggered by reduced but still positive business profits and prospects, rather than companies being bankrupt or entering administration.
Our analysis shows that creditor exits peaked in the third quarter of 2009 as the recession hit companies hard regardless of their ownership structure, and that numbers declined rapidly thereafter to a very low level in 2H 2010. This profile is inverse to the pattern of GDP growth over the recession, albeit with a lag of about six months.
PE exit routes 2005 - 2010
Exits to PE also recovered significantly in 2010, representing 47% of the number of realizations achieved over the year. This contrasts sharply with 2009, when just 7% of exits were to PE buyers.
The improvement in secondary buyouts reflects improved debt market conditions — lending banks were more able to support PE in 2010 as their own positions stabilized — as well as a greater focus by PE on making new investments, following two years of heavy concentration on working with existing portfolio companies.
In line with our findings in North America, our study has shown that secondaries have historically performed well. In many cases, they have produced higher than average returns, demonstrating there can still be significant value created during subsequent PE ownership. However, the improved confidence among PE firms was not matched by corporates.
Trade buyers remained highly cautious in 2010 and accounted for just 16% of exits by number in 2010, much lower than the 30% seen in prior years. Corporates have not returned to the M&A markets as quickly as PE, with our research showing corporate activity with PE, both buying from and selling to, well below historical levels.
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