We found evidence that PE is achieving organic revenue growth through the execution of fundamental changes in portfolio companies.
Our analysis since the start of the credit crunch (2008—10) shows that even where the contribution of extra leverage and stock market returns is negative, private equity's return from strategic and operational improvement remains firmly in positive territory.
A view into the performance and methods of PE
The 2010 private equity study provides a view into the performance and methods of PE, based on the analysis of just over 375 of the largest European businesses PE has exited over the last six years.
We found confirmation of what we had been hearing anecdotally: organic revenue was the largest driver of profit growth, accounting for 46% of the total across the whole period of our research, and even more significant for 2010 exits.
Perhaps more striking, we found evidence that PE is achieving organic revenue growth not only through investment expertise, by choosing the right markets, but also through the execution of fundamental changes in portfolio companies.
Key to achieving this is the amount of time spent by PE before a deal completes to ensure that the management team is strong and has the right skill sets in place to deliver on company strategy.
We found some evidence in the 2010 exits that PE firms are spending more time with their portfolio companies. In part, this was a reaction to the recession; it also represents a greater focus on designing and delivering on profit growth strategies.
And just as PE is taking time to buy well and improve portfolio company performance, we also found that it is investing more time and effort in preparing its businesses for sale, to ensure the best possible outcome. Two elements were noted in this year's research:
- There is often early engagement with management, potential new owners and advisers on the potential sale, to warm up key parties.
- There is investment in preparing robust, sell-side information to describe the business and tackle any uncertainties head-on.
The macro-economic outlook in Europe
While 2010 was a positive year for PE exits, and the first half of 2011 has shown a further improvement in exit numbers, current volatility in the public markets will likely impact exits, particularly IPOs of PE-backed companies. The macro-economic outlook still remains uncertain in Europe and beyond.
However, as our research shows, PE has proved itself far better able to weather the storm than anyone had anticipated in 2008 and remains robust.
We take a closer look at PE exits, strategies and future outlook in the following sections: