2007 a record year for private equity exits
Private equity outperforms public companies
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 publicmarket benchmarks, says Simon Perry, Global Head of Private Equity at Ernst & Young. “And our study counters thecontinuing myth that cheap debt and cost-cutting are the principal drivers of PE success.”
A key deal driver in Mergers & Acquisitions scene
The private equity sector continued in 2007 where it left off in 2006. In the latter year, it was reported that private equity had come of age in South Africa, with a number of major deals having been announced as well as record activity evident in funding.
“PE is a key driver in the South African M&A environment. The purchase of Edcon by PE arm of international advisory firm Bain for R25bn illustrated the growing role and appetite of PE players. The buyout constitutes the largest injection of foreign PE money into South Africa and was the largest PE transaction concluded in emerging markets last year,” says Sean McPhee, director, transaction Advisory Services at Ernst & Young.
In spite of the global economic slow-down and credit crunch, McPhee says South Africa remains attractive for private equity investors given the relatively low debt levels when compared to Europe and the USA. However, cheaper debt markets have all but dried up and traditional funding has become more expensive which means we would expect some changes to the way future deals are structured.
That said, in South Africa there was still approximately R32 billion of undrawn commitments available at the end or 2007 to invest and with valuations reducing to more realistic levels there are significant opportunities for private equity.
A sustainable model
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 comments, “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 combined 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 characterized 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.”
Credit crunch
Perry comments: “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.”
