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Private Equity and company performance
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 2006
Private equity buyout funds outperformed the public market indices in all investment time horizons except one for the period ending September 30, 2007, sometimes by as much as two to one – Thomson Financial US Private Equity Performance Index (PEPI)
The best private equity firms consistently “beat the fade” by sustaining their above-average performance over time and outperforming both their public-company and private-equity rivals. These top firms rely on a superior “capabilities-based” business model, which could be replicated to usher in a new round in the global competition for capital – 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, February 2008
Private equity generates strong and sustainable growth. Businesses owned by private equity in the US significantly outperformed their public company equivalents with regard to average annual growth in market value by as much as three to one. Moreover, employment levels were the same, or higher, at exit versus entry 80 percent of the time – Ernst & Young, Transaction Advisory Services, “How Do Private Equity Investors Create Value? A Study of 2006 Exits in the US and Western Europe,” 2007
Private equity investments lead to a “beneficial refocusing” of companies’ innovative portfolios invalidating popular misconceptions that private equity firms sacrifice necessary long-run investments in order to generate a quick profit. Patents of private equity-backed companies applied for in the years after the investment are more frequently cited (a widely accepted proxy for patent quality) – Lerner, Josh, Morten Sørensen, & Per Strömberg. “Private Equity and Long-Run Investment: The Case for Innovation,” The Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008, World Economic Forum, January 2008
The private equity ownership organizational form seems more long-term than temporary. Out of all the companies ever entering LBO status over the 1980-2007 period, 69 percent are still in the LBO organizational form by November 2007. At the beginning of 2007, close to 14,000 companies worldwide were in LBO ownership, compared with fewer than 5,000 in 2000 and fewer than 2,000 in the mid-1990s. Thus, the LBO organizational form is a long-run optimal governance structure for many firms in a variety of different industries and countries – Strömberg, Per. “The New Demography of Private Equity,” The Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008, World Economic Forum, January 2008
Results show the median buyout grew sales by 17 percent per year, EBITDA by 15 percent per year, and asset value by 7 percent per year. Profitability rose by three percent. When the median buyout was analyzed relative to industry peers, it outperformed comparable publicly traded companies in terms of sales (14 percent), EBIDTA (5 percent), and profitability (5 percent) growth. There was a slight decline in asset value relative to peers (-1 percent) – Gottschalg, Oliver. “Private Equity and Leveraged Buy-outs Study,” Policy Department, Economic and Scientific Policy, European Parliament, IP/A/ECON/IC/2007-November 2007
An examination of realized buyouts holding periods reveals that only 16 percent of all realizations take place in less than 24 months. The average holding period is 5.3 years. Moreover, a comparison of PE’s investment horizon with the stability of the stockholder base of publicly traded firms shows that after five years, buyout investors continue to be involved as majority shareholders in more than 45 percent of their investments as opposed to publicly traded firms where the original stockholder has disappeared in 88 percent of the cases – Gottschalg, Oliver. “Private Equity and Leveraged Buy-outs Study,” Policy Department, Economic and Scientific Policy, European Parliament, IP/A/ECON/IC/2007 - November 2007
Analysis of the IPOs of private equity-owned companies shows them significantly outperforming regular IPOs with regard to longer-term returns. A three-year investment in an average reverse LBO generated 10 percent greater returns to shareholders than a comparable three-year investment in the S&P 500 index. Moreover, 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,” Policy Department, Economic and Scientific Policy, European Parliament, IP/A/ECON/IC/2007-November 2007
Post-buyout, 91 percent of deals induced growth-oriented initiatives and 54 percent led to restructuring-oriented changes, dispelling the claim that sole purpose of buyouts is restructuring. Overall, the initial impetus for buyout deals is either of mixed character (growth and restructuring related) or motivated by growth objectives; after the buyout has occurred, more deals turn to growth generating activities than initially planned – Gottschalg, Oliver. “Private Equity and Leveraged Buy-outs Study,” Policy Department, Economic and Scientific Policy, European Parliament, IP/A/ECON/IC/2007-November 2007