Study reveals how private equity creates value

Three years ago, we pioneered a ground-breaking study on private equity value creation by examining private equity exits. Our latest study, "How do private equity investors create value? Beyond the credit crunch," reaffirms earlier findings that the largest private equity-owned businesses outperform public company benchmarks and that private equity investors generally create real value in their portfolio businesses. This was consistent across most geographies and industry sectors and for businesses of all sizes.

While private equity deal volume and deal returns will likely decline in 2008 and potentially beyond, the essential strengths of the private equity business model should continue to propel value creation for portfolio companies. Following are highlights from the study:

• Key metrics - In 2007, businesses sold by private equity firms outperformed public companies in the creation of value according to four key financial metrics: Enterprise value, profits, valuation multiples and productivity.
• EV performance - Enterprise value (EV), the key metric for the purposes of the study, grew at an impressive compound annual growth rate of 24% for the 100 largest global private equity exits, double the rate of public company counterparts.
• Provenance - Portfolio firms bought from private owners experienced the strongest EV increase, growing at 32% annually. Secondary buyouts of portfolio firms from other private equity investors increased EV by 27% while buyouts of formerly listed companies grew at 17%. Secondary buyouts were a significant portion of exits, making up 32% of the combined 2006 and 2007 exits sample compared to just 19% bought from public stock markets.
• Market impact - Significant value creation can be seen in the global 100 private equity exits, even after adjusting for the market fervor that drove up prices. In 2007 more than half of all multiple growth was attributable to strategies such as repositioning to more attractive areas; a track record of improved profits and cash flows; demonstration of better growth prospects; and securing customer or supplier contracts to underpin more certain cash flows.
• Investment rationale - The most common investment rationale was proactively targeting growth companies and/or growth sectors. This “invest in growth” strategy accounted for 47% of the 2006 and 2007 sample. Increasing the value of the core business was the rationale for the purchase of 37% of the firms while buy and build deals, or “roll-ups”, accounted for 16%.

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