The findings of a new study led by Professor Christoph Kaserer of the Technical University of Munich and released at the EVCA Mid-Market Forum in Budapest, show that by far the most significant factor in delivering returns from European mid-market buyouts is earnings growth, accounting for up to 75% of the overall return.
The study analysed the attributions of the IRR and money multiple returns of 332 fully-exited, anonymised mid-market* private equity investments funded between 1990 and 2011 – one of the largest European sample analysed for return attributions to date. The study focused on the relative contributions of earnings enhancement, wider market effects (multiple enhancements) and the impact of leverage.
The companies in the sample covered a broad range of European countries and industry sectors. 260 of the companies made no material acquisitions, with returns driven by operational improvement and organic growth.
The findings show that earnings growth accounts for between two thirds and three quarters of the overall deal return, with sales growth being the most important component of increased earnings. Doubling revenues between investment and exit, for example, increases IRR by 7.9% and the money multiple by 0.9. Leverage has a statistically insignificant effect on money multiple returns, with the median multiple varying by only 0.2 between the deals with the highest and lowest debt to EBITDA ratios. On average, the effect of leverage does however contribute about a third of relative return attribution to IRRs.
The median money multiple for the buyouts analysed was 2.36 and the median IRR 29%. Exits via sale to another buyout firm (secondary buyout) consistently generated the highest returns with median money multiples of 3.0; trade sales and IPOs produced a median multiple of 2.4. The location of the deal and exit made no significant difference to returns.
The study shows that multiple enhancements such as wider market movements, entry and exit timings are not fundamental drivers of money multiple returns. In 60% of the investments, the fund managers held a clear majority stake. Controlling stakes as single investor or within a syndicate are thought positively to influence overall returns.
Commenting on the findings, Professor Kaserer, says: “With the new methodology that we have developed for this study, we have made a robust start in analysing this important area of private equity. Understanding how returns are achieved byfund managers, will provide relevant data to investors in this important asset class. We are very grateful to the fund managers who contributed portfolio company data for this study.”
Craig Donaldson, Chairman of EVCA’s Mid Market Council, adds: “This study indicates that mid-market private equity can deliver strong growth-related returns for investors and, in doing so, make a vital contribution to the economies of Europe. We work with companies to support improved performance, competitiveness and growth – and we are generally successful in doing just that. These data and findings are a helpful start to analysing our progress. Further research and analysis on returns is under way and will, no doubt, gather momentum. Academic institutions such as TUM are well placed to gather and objectively analyse anonymous data from fund managers and it is in the best interests of our industry to support these efforts.”
