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• An analysis of private equity-backed initial public stock offerings shows that they significantly outperform regular IPOs with regard to longer-term returns. A three-year investment in an average PE-backed IPO delivered 10 percent greater returns to shareholders than a comparable three-year investment in the S&P 500 index. Moreover, many PE firms only partially exit their investments at the time of the IPO and continue to “participate in the long-term value appreciation of the IPO stock” (Gottschalg, Oliver. “Private Equity and Leveraged Buy-outs Study,” IP/A/ECON/WS/2007-18, Policy Department, Economic and Scientific Policy, European Parliament, November 2007, pp. 23-24.)
• Private equity investment makes companies stronger when they enter public equity markets. The share price of companies owned by PE firms for a year or more that went public between 1981 and 2003 outperformed the stock market as a whole over a three-to-five year period. The PE-backed IPOs were on average much larger in size, more profitable, and were backed by more reputable underwriters. (Cao, Jerry X. and Lerner, Josh, “The Performance of Reverse Leveraged Buyouts,” Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market, October 15, 2006.)
• A 2008 study by The Boston Consulting Group found that operational improvement as a source of value increased two-fold between the 1980s and today to contribute more than a third of portfolio companies’ value growth. (Brigl, Michael, Alejandro Herrera, Heinrich Liechtenstein, Heino Meerkatt, M. Julia Prats, and John Rose. “The Advantage of Persistence: How the Best Private Equity Firm ‘Beat the Fade,’” The Boston Consulting Group, 21 February 2008.)
• Two-thirds of the earnings growth (before taxes, interest and capital expense) at PE-owned portfolio companies came from business expansion, with organic revenue growth being the most significant element. This included the benefits of investment in sales and marketing and new product launches. Cost reductions accounted for only 23 percent of pre-tax earnings growth in U.S. companies and 31 percent in European companies. In short, asset stripping is not the way PE firms build value. (Ernst & Young, Transaction Advisory Services, “How Do Private Equity Investors Create Value? A Study of 2006 Exits in the US and Western Europe,” 2007.)
• PE-acquired companies outperformed comparable publicly traded companies in terms of growth in sales (14 percent), earnings before taxes, interest and capital expense (five percent), and profitability (five percent), although there was a one percent decline in asset value relative to peers. (Gottschalg, Oliver. “Private Equity and Leveraged Buy-outs Study,” Policy Department, Economic and Scientific Policy, European Parliament, IP/A/ECON/IC/2007-25, November 2007.)