London Business School research has attempted to answer the age-old question: Who are better buyers, private equity or strategics?
The study, which focused on European companies, found PE portfolio companies “significantly” outperformed similar non-PE owned companies during the first three years. Sales at portfolio companies more than doubled, EBITDA doubled and total assets increased close to 85 percent, the study said.
“The results show that while GPs focus on growth, they also generate significant operational improvements that likely contribute to that outperformance,” said Adveq Chief Executive Sven Lidén in an emailed response to questions.
Leverage did increase, however, regardless of the size of the PE portfolio company, the study said. In fact, debt grew an average of around 9.5 percent for non-acquired companies to 13.5 percent for PE portfolio companies, said Lidén. The Adveq CEO called the boost in debt “very small” and “logical.”
“Our thesis is that private-equity-owned firms invest more in expansion and use capital more efficiently than other companies,” he wrote.
“Value Creation in Buyout Deals: European Evidence” looked at 1,552 European private-equity-initiated deals executed from 1998 to 2014. The PE department at the London Business School conducted the research, which was supported by Adveq.
When the school considered acquisition prices, researchers compared companies acquired by PE firms with those bought by strategic buyers, Lidén said. The other comparisons in the study are between portfolio companies and other firms of the same size in the same industry, he said. Read the study here.
PE firms appear to be better dealmakers. PE funds paid valuation multiples about 8.3 percent lower than corporate buyers for similar deals in Europe executed during the same year, the study said. (The study accounted for deal characteristics, percentage ownership as well as country, industry, and macroeconomic trends.)
This may be due to GPs being better negotiators and able to close deals with significant discounts relative to corporate buyers, or PE execs able to find cheaper targets, the LSB said.
Corporate deals may include “synergy premiums” that aren’t included in the average PE deals, the study said.
Strategics may also be willing to pay premiums because they hope to achieve savings that justify the higher prices, Lidén said.
Smaller funds, those with less than $500 million, are better owners, the study said. These funds generate the most significant post-buyout sales growth, 120 percent, at their portfolio companies.
Larger funds, meanwhile, produce average sales growth of 37 percent, the study said. The LBS noted that GPs of larger funds typically target greater operational improvements — while smaller funds focus on growth — and their portfolio companies showed great EBITDA gains. Established GPs increased EBITDA by close to 100 percent while other PE firms generated EBITDA growth of 37 percent to 41 percent, the study said.
“GPs with more funds under management pursue operating efficiencies to generate value while GPs with few funds under management appear to focus on sales growth,” the study said.
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