There’s only one true way to settle the age-old “Is private equity a positive force” question, and that is to look at the performance of PE companies after the exit. Assuming the buyout firm made a profit for itself and its investors, the real test lies in a portfolio company’s post-PE lifetime.
It’s simple. If the company is leaner, more competitive and stronger than it was before private equity intervened, then the LBO detractors have no case. If it is so crippled with debt and stripped to its bare bones that it struggles or fails, then maybe they’re right.
There’s not much comprehensive data on this topic, but today, the Wall Street Journal published a slice of evidence that paints private equity pros as the good guys. A story titled “Private Equity IPOs Outperforming Others” cites data that shows, between 2003 and 2008, PE-backed IPOs in Europe have performed better than their non-PE-backed counterparts.
Sponsor-backed IPOs showed an average share-price change from list price to the price on April 23 this year of minus-20%. For nonsponsor-backed IPOs the figure was minus-37%.
Buyout pros always tout the “discipline of leverage” their buyout targets are forced to learn. In a recession, with “leverage” a dirty word and a long list of buyout-backed bankruptcies, that argument is difficult to make. Those making it have one small piece of evidence in their favor.
The story quotes one buyout believer making that very case:
(John Cole, a Partner at Ernst & Young) added: “Private equity does provide a level of discipline to companies, and that benefit certainly has not become invalid in this market. A clear, sharp focus in terms of a business’s goals isn’t to be sneered at. Management teams that have worked under private-equity ownership have benefited from the experience.