2007 A Record Year For Private Equity Exits, Says Report

by Jason Gorringe, Tax-News.com, London

11 July 2008

Despite the credit crunch, the enterprise value (EV) growth of private equity-owned businesses firms outperformed that of the public companies for the third consecutive year, according to Ernst & Young’s global study of the 100 largest private equity exits in 2007, "How do private equity investors create value? Beyond the credit crunch."

In 2007, the annual EV growth rate for the 100 largest global private equity (PE) exits was 24%, double the rate of public company counterparts.

This applied to exits of all sizes within the study sample, including the mega deals. PE exits also outperformed the public company benchmark across all major industry sectors and in virtually every market around the globe with 2007 exits growing EBITDA 33% faster than their public counterparts.

“As in previous years, 2007 exits revealed superior value creation in the businesses owned by PE firms around the world compared to public market benchmarks, explained Simon Perry, Global Head of Private Equity at Ernst & Young, adding:

“And our study counters the continuing myth that cheap debt and cost-cutting are the principal drivers of PE success.”

In 2007, more than half of all multiple growth charted for the top exits was attributable to the success of strategies implemented under PE ownership.

Perry goes on to comment:

“The PE business model has a straightforward goal: developing more valuable businesses. The relentless focus on implementing a clear plan for growth and performance improvement with the discipline of an expectation of exit within a defined time frame all contribute to value creation.

“For the 2007 global exits, portfolio company ownership was marked by strategic, management and operational savvy. The focus on organic growth was an important element with geographical expansion, improved selling and introduction of new products all having measurable impact. PE investors also achieved growth through acquisitions and restructuring.”

Addressing the credit crunch, Perry states:

“In spite of the market challenges of the last few months, the proven ability of PE to outperform public companies on key metrics strongly suggests that the industry can manage a slowdown and position itself to advantage when the market returns".

The best PE investors have proven that they can deliver superior profits, value and investment returns. Saying that, PE firms are likely to hold investments longer and to see slower multiple growth before the market corrects itself.

In this environment, the PE firms will need to hone their portfolio management practices – particularly of troubled investments given the increasing scrutiny of media, unions and governments. Selling well will be trickier involving longer timeframes and adjusted expectations.

“The cycle must work itself through. As exit volumes contract in 2008 and potentially beyond, fundraising is predicted to weaken and fund returns to decline. But when the market recovers, PE firms will be poised with a basket of better businesses ripe for exit.”

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