How private equity investors create value

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The 2017 How private equity investors create value study is presented by EY and African Private Equity and Venture Capital Association (AVCA).

The study examines Private Equity (PE) exits from 2007 to 2016 using data drawn from both public sources and confidential, detailed interviews with former PE owners of exited businesses for exits to 2015. For 2016, our analysis is limited to publicly available information.

The study now draws from a population of 350 exits occurring in Africa over the study period. The exits had a minimum entry enterprise value of US$1m and included only full (not partial) exits. Our analysis entails an examination of the decision to invest, value creation during PE ownership, exit strategies and key lessons learned during the process. Our aim is to produce an analysis that can help enhance the understanding of exit modalities and strategies in African markets and the underlying drivers of value creation.

  • Exit activity in Africa (2007–2016)

    PE exits hit records highs in 2016

    EY - PE exits hit records highs in 2016

    The number of exits achieved by PE houses in Africa has showed an upward trend with a record number of exits in 2016.

    The regional view

    EY - The regional view

    The bulk of PE exits continue to be concentrated in South Africa (SA). Exits in North Africa increased to its highest levels in 2016 and exits in West Africa also recovered in 2016.

    Top countries for exits (2007–2016)

    EY - Top countries for exits (2007–2016)

    Over the last 10 years, the top five countries accounted for 70% of PE exits.

    Number of PE houses exiting

    EY - Number of PE houses exiting

    The number of PE houses achieving exits in 2016 increased slightly to a new high of 31 PE houses, indicating that the African PE sector continues to mature despite recent economic headwinds, which a number of African economies have experienced recently.

    PE exits by industry

    EY - PE exits by industry

    Financial services, industrials, consumer goods and services continued to attract the highest number of PE exits between 2007 and 2016, and during the last three years. Exits from the healthcare and industrials sectors continued to increase.

    Average holding period by year

    EY - Average holding period by year

    An increase in the average holding period confirms our view that PE houses are inclined to hold their investments in portfolio companies for longer than developed markets. The average in 2016 is also distorted by a greater number of exits of infrastructure investments with longer hold periods.

    Exit route

    EY - Exit route

    A significant uptick in sales to PE and other financial buyers occurred in 2016 indicating a maturing and more competitive African PE industry. A marked decline in management buy outs (MBOs) and private sales occurred in 2016.

    Exits to trade buyers still represent the most common exit route.

    Trade buyer by type

    EY - Trade buyer by type

    Local companies continued to represent the largest proportion of trade buyers.

    PE or financial buyer by type

    EY - TITLE

    Multinational financial investors account for the largest share of financial buyers, while interest from local financial investors has increased.

    The increase in the proportion of multinational PE / financial investors is consistent with the understanding that global / pan-emerging market PE / financial investors view PE-owned companies as attractive investment opportunities.

  • Looking forward

    Where to invest next

    EY - Where to invest next

    Outlook for exit activity

    On the basis of AVCA’s member outreach, PE funds views on the outlook for exits are:

    • Increase in overall exit activity and in auction processes
    • Trade sales expected to continue to dominate as an exit route
    • More exits via PE or financial buyers expected as the number of PE houses is increasing
    • Pressure on certain sectors may lead to miss-matched price expectations
    Lessons in better preparing for exits and enhancing value creation

    On the basis of EY Global Divestment Study, which included interviews with 100 PE houses, 70% of PE houses surveyed fail to adequately prepare on time for an exit. Ten key considerations for delivering better exits and enhancing value creation are:

    • More rigorous portfolio reviews
    • More time and focus on exit planning
    • Use analytics to make faster and better divestment decisions with greater factual support for the equity story
    • Developing scale that is interesting to strategic investors
    • Portfolio company management to be well prepared and have adequate (internal and external) resources
    • Use an independent exit committee
    • Expand the buyer pool by consistently re-evaluating possible buyer lists
    • Timing in light of macro and other market uncertainties
    • Make technological change a priority consideration to improve portfolio company’s operations pre exit
    • Balance price maximization and the ability to close a transaction with different buyers