The BVCA has launched the twelfth annual report on the performance of private equity-owned portfolio companies, compiled by EY. The report presents independently prepared information to inform the broader business, regulatory and public debate on the impact of private equity ownership on large UK businesses, commissioned by the BVCA.
The aggregated data in the report covers 93% of the total population of portfolio companies, being all the large, UK businesses that met certain criteria applied at the time of their acquisition by private equity investors. This year, compliance for the current portfolio companies was 49 of 55, or 89%.
The two main measures used in this report cover:
- The entire period of PE ownership of all the portfolio companies i.e. from initial acquisition to latest date or exit
- The latest year on the prior-year comparison of the current portfolio companies.
In aggregate, the portfolio companies under the time of private equity ownership have shown positive growth in employment, investment, productivity, revenue, profits and returns to investors, and supported the high financial leverage that is a feature of the private equity business model.
PE owners have invested more in bolt-on acquisitions than they have realised in partial disposals, that have added to the positive underlying organic trends. Compared with relevant public company and UK-wide private sector benchmarks, the performance of the portfolio companies on employment, investment, compensation and productivity growth is in line or ahead of their comparators, indicating some benefits of the PE ownership model. The gross financial returns from the equity investments in the portfolio companies are three or four times greater than the public stock market benchmark – benefitting from both additional financial leverage as well as strategic and operational outperformance.
- The average timeframe of PE investment in the portfolio companies is 5.8 years, i.e., from initial acquisition to exit. The current portfolio companies have been owned for an average of 3.8 years.
- Reported employment under PE ownership has grown by 3.1% per annum. Underlying organic employment growth (removing the effects of bolt-on acquisitions and partial disposals) has grown by 1.5% per annum. Annual employment growth of the portfolio companies is above the private sector benchmark of 1.3% (organic) but below the public company benchmark of 3.4% growth (reported).
- Average annual employee compensation growth under PE ownership is above the UK private sector benchmark, at 2.9% versus 2.7%.
- Investment in operating capital employed in the portfolio companies has grown by 2.2% per annum. PE investors, in aggregate, have used the current portfolio companies.
- Labour and capital productivity have grown under PE ownership, by 1.4%–2.4% and 6.9% per annum respectively. Capital productivity growth in the portfolio companies exceeds public company benchmarks, at 6.9% versus 1.2% growth per annum.
- Since acquisition, the portfolio companies have grown reported revenue at 7.1% per annum and profit at 4.4% per annum; organic revenue and profit growth have grown at 5.1% and 3.2% per annum respectively. Revenue and profit growth at the portfolio companies is broadly in line with public company benchmarks with slightly faster revenue growth and comparable profit growth at 7.1% and 4.4% per annum respectively.
- The equity return from Portfolio Company exits is 3.4 x public company benchmark; over half of the additional return is due to PE strategic and operational improvement and the rest from additional financial leverage.
Matthew Webster, EY partner, who led the research, said: “Analysing the last twelve years of data on this defined set of current and past portfolio companies shows the effects of private ownership on large UK businesses. While there is variation at the individual portfolio company level, in aggregate the findings are clear that the private equity effect is positive, or neutral, on large UK business across all of the measures that we have tested. The private equity-owned portfolio companies generate employment, increase investment and grow.
“One area where PE outperforms its comparators in public companies is investment performance, where the PE-owned portfolio companies generate far greater returns to investors from a mix of additional leverage and strategic out-performance.”
About the report
This is the twelfth annual report on the performance of portfolio companies, a group of large, private equity-owned UK businesses that met defined criteria at the time of acquisition. Its publication is one of the steps adopted by the private equity industry to improve transparency and disclosure, under the oversight of the Private Equity Reporting Group.
The report is based on information provided on the portfolio companies by the private equity firms that own them. With a large number of portfolio companies, and now eleven years of information, this report provides a comprehensive and detailed insight into the effect of private equity ownership on large, UK businesses. As the study notes, it is possible to make a wide range of claims about the effect of private equity ownership if the fact-base is limited to any one or two examples. This report aggregates data across a defined set of businesses, which gives a robust fact-base.