PwC’s recent survey of private equity backed companies indicates that the popular perception of private equity as an investor only involved for short term gains could not be further from the truth.
The reality is that PE houses are perceived as more willing to finance companies than traditional lenders and prepared to invest for growth.
The survey of nearly 100 PE backed companies in the UK found that 74 per cent of portfolio companies said their PE backers were willing to invest further capital into their businesses, compared to 66 per cent of respondents saying the same about their lenders – with more than a third of portfolio companies saying their lenders were not willing to extend further facilities.
Duncan Skailes, partner and UK private equity portfolio company leader, PwC, says: “Private equity has been maligned in the media for appearing to extract value from a portfolio company before moving quickly on, but our research into those companies paints a different picture. Most portfolio companies have stated that their strategy has sufficient flexibility built in to achieve their objectives and also that their private equity owners are open to amending the strategy when required.
“This confidence in future growth is further backed up by the fact that 90 per cent of our respondents expect to maintain or increase their permanent staffing levels in the coming year – a significant increase on last year when only 60 per cent said the same. Given the economic backdrop and current news headlines, it is perhaps surprising to note that the sectors most likely to increase headcount are retail, leisure and hospitality, but encouraging to be told that private equity sees growth in these generally troubled areas. Overall, our survey shows us that PE backed companies are optimistic about the future and confident that their backers will support them in their growth ambitions.”
PE companies are holding onto their portfolio companies for longer in the current climate, which has caused some tension between the portfolio companies and their owners as they are looking to their backers for help in planning for an exit. But overall, portfolio companies have reported an improvement in exit conditions as well as their own readiness for exit.
Nearly three quarters of respondents feel they are either quite or very ready for an exit if an offer came up now and 60 per cent have drawn up a list of potential purchasers. Expectations around the time frame for an exit have also fallen slightly from the previous year. Trade sales remain the most likely exit route, with less than a fifth favouring an IPO. However, PwC’s recent IPO Watch survey saw a surge in PE backed IPOs in March with two of the top five European IPOs being private equity backed companies. With the pipeline for listings from PE backed companies also looking strong, it remains to be seen if this perception rings true.
Operational performance remains a challenge with one in four finding it difficult to model future scenarios, suggesting there is a significant minority who could benefit from more control over their strategy by their PE owners. In addition, portfolio companies are reporting that with more of a focus on business drivers, it is their finance teams who are feeling the pressure. Almost three quarters report that under PE ownership, the finance team faces an increased workload with regards to pricing and profitability analysis and cash/working capital management.
The sentiments expressed by the portfolio companies in the survey, also appear to be mirrored by the private equity firms themselves.
James Fillingham, partner, head of private equity deals at PwC, says: “The private equity industry and the companies it backs remain in good health. There is a large volume of funds still unspent in private equity, as well as a large number of portfolio companies that will see exits. Those exits will demonstrate the ability of private equity and the companies they back to create value and show growth above GDP. That growth will come through the UK economy in more jobs, more taxes and more spending.
“It is also an interesting world where the equity provider is more willing to put in more money than the bank, a secured lender. This shows private equity firms are more prepared to take measured risks and to support UK companies investing in growth.”
