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A renewed appetite for private equity investors - Key findings: 2010 exits, private equity exhibits recovery - EY - United States

A renewed appetite for private equity investors (North American study)

Key findings: 2010 exits, private equity exhibits recovery

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57% of returns generated by PE between 2006 and 2010 can be attributed to PE's value-add

What 2010 exits reveal

Our 2010 study shows an improvement in PE exit activity over the previous two years, marking the start of a return to more normal levels. PE sought to take advantage of the recovery in the wider economy characterized by improved valuations, higher levels of confidence among some buyers and increased capital markets activity — all in all, a receptive environment that PE capitalized on by exiting companies in its portfolio.

PE exits by year — N and total entry EV

This follows an intense period of value preservation in 2008 and 2009, when firms worked to reduce or refinance debt loads. Extending debt maturities provided breathing room to implement strategic and operational improvements and cost reductions.

These initiatives clearly paid off for PE, as firms that managed their portfolios effectively during the crisis were well rewarded in 2010. In an encouraging sign, our study observes that performance is improving: internal rates of return (IRRs) are positive in 2010 but remain below the average of the boom years.

This demonstrates that PE's unique form of ownership enabled it to steer portfolio companies through a difficult environment and position them well for an upturn in economic conditions. The results of the improvements made to the portfolio over the last two to three years could result in further increases in valuations in the future, as long as the economy stabilizes.

Private equity exits show signs of recovery

The recovery in exits was evident in 2010. PE exits by number increased to 118 in 2010 — from 51 in 2008 and 76 in 2009 — a similar figure to those recorded in pre-crisis times. In our study last year, we pointed to PE firms concentrating on exiting companies in 2009 in non-cyclical and counter-cyclical sectors, particularly via IPO.

In 2010, the market began to normalize as PE divested across industry sectors, reaffirming more positive market conditions. Though creditor exits still appeared in our sample in 2010, their numbers decreased slightly, as industries that were hardest hit by the recession — real estate, retail and consumer products appeared to bottom out.

In 2010, the market began to normalize as PE divested across industry sectors, reaffirming more positive market conditions. Though creditor exits still appeared in our sample in 2010, their numbers decreased slightly, as industries that were hardest hit by the recession — real estate, retail and consumer products appeared to bottom out.

The best performing sectors were energy and telecom, which exhibited recession-proof credentials. Industrials also performed well in 2010, consistent with the start of the economic recovery.

As we predicted in our last study, exits to PE staged a comeback in 2010, doubling in volume compared with 2009. While this is clearly a far cry from 2007 levels, when over one-third of exits were via secondary buyouts, it reflects an increased appetite among PE for buying high‑quality businesses supported by improved debt markets.

Private equity's desire for liquidity

The proportion of IPOs in the 2010 sample reduced in volume to one‑fifth of the PE exits, with 23 PE‑backed IPOs occurring in 2010 — only two more than in our 2009 sample. IPO continued to be a popular exit route for deals of all sizes, though it was the chosen exit route in 2010 for a significant portion of the largest deals — companies sold through IPO had the highest average entry enterprise value at US$1.1b.

PE firms are beginning to exit the largest portfolio holdings at a faster pace than the next size tier. Between 2008 and 2010, portfolio companies with an entry EV over US$2b dropped 30% versus those companies with an entry EV between US$1b and US$2b, which only fell 13%. This can likely be attributed to the open IPO window in 2010 and fewer options with other sale alternatives.

Corporates also re-emerged as a significant source of liquidity, representing over 50% of buyers of PE exits in 2010. After years on the sidelines, strategic buyers began to slowly and selectively re-engage in the broader M&A space.

A considerable amount of this activity was focused on acquiring from PE, as PE's desire for liquidity was met by large corporate cash reserves amassed over the last three years. By the end of 2010, non-financial US corporates had over US$2,000b of cash on their balance sheets and a lack of conviction in terms of plans for spend.1

Despite this, both European and North American markets face the same challenge of lower-than-average M&A activity by corporates. Given the importance of trade sales as an exit route, PE exit activity will not recover fully until corporates return in full force.

Percentage of all exits by IPO, 2006–10

1Source: Capital IQ.



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