This Saturday marks the official midpoint of the summer, and for those in finance, that heralds the onset of a major slowdown. In an already slow market, what’s a firm to do? For many, the summer signals survey time. I’ve got the heads-up on several of the best PE-focused studies. Today I’m looking at the Ernst & Young Annual Private Equity Study. Look out next week for one from PE Week Wire’s sugar daddy, Thomson Reuters.
The E&Y study focuses solely on value-creation, and for three years has proclaimed that private equity firms create greater value than public company benchmarks. In 2007, PE exits grew EBITDA 27% faster than that of public companies. Same goes for enterprise value—PE exits grew enterprise value twice as much as public companies did.
That’s good news for private equity’s uphill public relations battle. But one thing the survey doesn’t address is the performance of companies after the PE firm exits, which I think is just as important. Is the value creation permanent and sustainable? Did the company wilt without the PE firm’s pressure, best practices, and drive for improvement? Was the company overburdened with leftover LBO debt? The answers to these questions are important in addressing the general public’s negative image of private equity. Without taking a long term look, it’s like a High School that says, “100% of our graduates go to Harvard,” but doesn’t say whether any of those students made it out of Cambridge with diplomas.
That said, changing PE’s image isn’t the goal of Ernst & Young’s study.
E&Y principals John Vester and John O’Neill offered some interesting analysis on the findings. For example, O’Neill agreed that part of the reason PE creates more value is because they can make long-term changes that may have a short-term negative effect; public companies, by comparison, may avoid those changes because of quarterly earnings pressure.
The best performing investments, size-wise, were companies ranging between $500 million and $1 billion. O’Neill said it’s because those deals are “single entity-type businesses” that can focus all their resources on one goal and achieve scale, as opposed to jumbo companies with their hands in several verticals.
The study found that Germany is the most successful geography for PE investments, and that tech and telecom showed the highest growth in enterprise values. That’s notable since the study did not cover venture capital investors.
But LBO returns are going to drop, Vester said, and 2008-2009 exits won’t outperform their public counterparts as deftly as they did in recent years. Part of the growth, even though GPs rarely cop to it, comes from leverage. So with less leverage and longer hold periods, that 27% EBITDA growth over public benchmarks will come down a touch.
To request the survey, go here.