Private equity drives productivity and employment across Europe
London, 8 June 2012 — There were 83 private equity (PE) exits in Europe last year, the highest number since 2006 and 2007, according to Branching out – How do private equity investors create value?, an annual study of the European PE industry by Ernst & Young.
The study looks at how PE investors create value and analyzes the performance of businesses during PE ownership. Over the last seven years, the research has shown that 87% of realized investments generated a positive return for investors, while the gross return on these PE investments outperformed investments in comparable public companies by a factor 3.6 times.
Sachin Date, Europe, Middle East, India and Africa Private Equity Leader at Ernst & Young says: “PE was able to improve productivity by 6.9% per year across all European markets. It created more valuable, fitter businesses, notably in the UK, Ireland, France, Germany, Switzerland and Austria, while also increasing employee numbers at the same time.”
The overall picture that emerges from the study is one of improving health for PE. Exit activity grew last year, primarily on the return of trade buyers – who had their strongest showing since 2005 – accounting for 39% of 2011 exits. Creditor exits also continued to decline and PE investments continued to deliver outperformance relative to public markets. And, while the patterns of returns, outperformance and productivity growth have varied across different markets analyzed in this report, the overall conclusion is that the PE model has had widespread success. Selecting investments and driving business improvements have been key to successful PE investment.
PE performance by industry sectors
By industry sector, business services, retail and health care emerge as the best-performing and largest sectors for PE. All three have delivered above-average returns and above-average portfolio growth. By contrast, capital- and consumer-led sectors, such as personal and household goods, have seen below-average performance and growth — in line with lower returns from public companies in the sector.
The business services sector has been particularly successful for PE. It has grown strongly and delivered above-average returns. Explains Harry Nicholson, Private Equity Partner at Ernst & Young LLP: “Deals in this sector are typically smaller than average and the portfolio has a high concentration in the UK, with very few creditor exits.”
Among the larger sectors, portfolio growth has been highest in health care. “This reflects the attractions of the health care sector as the effect of an aging population in Europe plays out, along with its largely non-cyclical nature and the prospects for further growth of the private sector in many parts of Europe,” comments Harry. Its strong growth and above-average returns are in part influenced by a few large deals — most of the rest of the deals in this sector have been at the smaller end, with opportunities emerging from private, corporate and PE sellers.
Retail is the second largest sector in the portfolio, with growth driven mainly by large transactions completed before the credit crunch. The incidence of creditor exits is also low in this sector — one of the contributing factors to the sector’s above-average performance. However, exit activity is below average. Harry continues: “Across Europe, we find that PE firms are increasingly organizing themselves by industry sector in order to harness experience, focus on activities and develop in-house expertise. A sector focus strategy often generates better returns than a generalist approach.”
“The increase in 2011 exits is clearly positive for PE, particularly as the year saw a high level of activity from trade buyers, particularly those outside Europe. So far in 2012, the exit market looks similarly encouraging, with trade buyers, continuing to acquire from PE portfolios. PE needs to take the opportunity of increased overseas interest from the US and Asia-Pacific buyers, to increase its exit pace further, while getting European trade buyers onboard will still remain challenging,” concludes Sachin.
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About the studies
The 2011 study provides insights into the performance and methods of PE, based on the analysis of the largest European businesses that PE has exited over the last seven years. The owners of these businesses were not all Europe-based themselves; this is not a study of the performance of European-based PE investors, but is rather an analysis of the impact of PE on European businesses.
To avoid performance bias, and to ensure a focus on the largest businesses owned by PE, exits were screened to capture only those that had an EV at entry of more that €150m. This criterion was also applied to our estimate of the current size of the PE portfolio. In total, we have identified 473 exits of businesses that met our criteria over the seven years from 2005 through 2011 — the “sample”.
We assessed business performance for the duration of PE ownership — i.e., from entry to exit — based on key performance measures, including change in E V, profit (defined throughout this report as earnings before interest, tax, depreciation and amortization, or EBITDA), employment, productivity (defined as EBITDA divided by number of employees) and valuation multiple. To better measure aggregate economic impact, we used weighted averages.
This independent study is built with public data across the whole sample and detailed, confidential interviews with former PE owners of these businesses. Overall, we have performance data for up to 319 businesses or 67% of the total population. Looking across key performance dimensions (e.g., deal size, exit route, incidence of creditor exits), there is no discernible bias in the composition of the sample compared with the whole population. For some of the performance metrics, our sample size is smaller than 319, and there is no significant bias compared to the whole population as measured by EV growth.
EV growth for the different sub-samples in this study
Relative returns and portfolio growth by sector, 2005–2011
PE returns compared to the market;
Productivity and employment growth for PE-backed companies
Number of exits in population and sample, by region
Number of exits in population, 2005–2011
Coverage (sample as a % of population)
Finally, in order to evaluate the performance of PE-owned businesses against comparable public companies, we have compiled data on public companies by country and sector over the same time period as the PE exits in our sample. The data was then aggregated to compare PE performance to that of public companies.
The ability to incorporate data obtained directly from interviews with top PE investors is an important feature of the study. Another is the scope and depth of our research, with a database of more than 470 European PE exits. Our study is recognized by many commentators as the authoritative work in this field.
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