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PE-Owned Companies Surpass Public Counterparts
E&Y study finds buy-and-build approach demonstrates strongest profit growth in PE portfolio companies.
July 9, 2008
Portfolio companies of private equity firms have surpassed the financial performance of publicly-listed companies for the third straight year, according to a new report from Ernst & Young.
The accounting consultancy, which announced its third annual study about how private equity investors create value on Wednesday, analyzed the global buyout industry’s 100 largest exits last year, including 44 spread between Canada and the US, and 53 realizations in continental Europe and the UK. It found that the average yearly growth of private equity-sponsored companies in 2007 in terms of enterprise value, or overall measure of true worth as function of equity value plus total debt, was double, or 24%, that of publicly-traded companies, just slightly up from 23% for the same metric in 2006.
Moreover, the Ernst & Young report found the Ebitda growth of portfolio companies outpaced comparable public businesses by 33%.
When it came to transaction types, private equity purchases of corporate divisions through divestitures proved to be the best performers post-acquisition. Businesses acquired through carve-outs generated enterprise value growth rate of 25%, compared with take-private acquisitions of public companies that produced enterprise value growth of 17%.
Ernst & Young also found that the prevalent middle-market strategy of using a buy-and-build approach to build value, or growth via add-on acquisitions, demonstrated stronger profit growth at private equity-backed companies rather than other models.
The deal flow last year from secondary buyouts, or acquisitions of buyout firm-owned companies by other private equity firms, meanwhile, was greater for the last two years, with 32% of combined 2006 and 2007 exits as compared with take-private deals for the same period that made up 19% of exits. Interestingly, secondary purchases led to an increase in enterprise valuation by an average 27%. In Europe, secondary buyouts generated 29% of exits for 2006 and 2007 combined.
According to Ernst & Young, despite macro-economic uncertainty and a possible global retraction in profit growth, the proven ability of private equity to outpace public companies on key metrics “strongly suggests that the industry can manage a slowdown and position itself to advantage when the [M&A] market returns.”
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