Many private equity portfolios are staging a post-recession comeback and are outperforming their non PE-owned industry peers, according to the latest study of the European private equity industry by AT Kearny.
The report analyses PE transactions in four core European markets – the United Kingdom, DACH (Germany, Austria & Switzerland) , France and the Nordic countries and illustrates the meteoric rise and fall of the industry during the recent past. The study records the recent financial performance of more than 100 European PE portfolios versus their public-industry peers.
The research has identified the rise of two distinct governance models for PE firms which AT Kearney has labelled ‘Supervisor’ and ‘Operator’ models.
The Supervisors operate very much with a “we trust management” approach and work through the board appointments and are involved less in the tactical decision making. Many of these funds, particularly traditional houses with banking roots, work actively with management at board level. In some jurisdictions, tax considerations might favour this governance model, which maintains the status of wealth-administrating vehicles. The Operators work to a more “we drive change” agenda and add their own dedicated teams to review the strategy and manage operations. Operational teams comprise three to seven professionals for an average European portfolio.
Contrary to accepted wisdom, PE firms that take on a supervisory role – giving the deal partner responsibility from acquisition through exit – deliver more value by balancing growth and profitability as this report shows. Success factors such as cash management and managerial discipline are transferable into other industries for those willing to learn from the PE owners.
Philip Dunne, partner in the private equity practice at AT Kearney says: “Our study shows that private equity works – period. They’ve taken a PR hit in the recession but the numbers don’t lie – private equity ownership is a successful way of running companies. The PE houses encourage managers to behave like owners, make capital work hard, create an adaptable investment plan and become an active shareholder. “
The results of the study are telling. Since 2006, PE portfolio companies have out-performed their public-industry peers on key financial metrics. This has been seen primarily in slow-growth industries, such as chemicals (0.3% growth), large consumer goods and retail (4.5%), manufacturing (2.6%), and business services (5.4% ), as identified in the report as the four slowest growing. PE portfolios have a higher share of value growers (31% compared to 25%) and a lower proportion than the peer group of underperformers (20% versus 28% in the peer group). Even during 2009, the crucial year of the crisis, average decline in revenues for PE was 3.8% compared to 9.1% for peers.
Michael Ostroumov, one of the authors of the study and a principle in the private equity practice says: “At a time when the entire global finance industry is under scrutiny, this study shows that the PE model drives value well beyond wealth creation for the job owners. PE firms rejuvenate portfolio companies, create jobs and open new markets that benefit customers, employees, supplies and the communities in which they operate. “
