BVCA defends asset strapping

The BVCA’s first annual report into the performance of some of the UK’s largest private equity-owned companies has found evidence of organic growth, revenue increases and more jobs.

The report, published by Ernst & Young, examined the performance of 28 of the UK’s largest private equity-owned businesses that met all of the Walker Guidelines at the end of December 2007, including Alliance Boots, Odeon & UCI Cinemas, Somerfield, Thames Water and Weetabix.

A further 14 companies that exited over the period 2005 to 2007, including Debenhams, Travelodge and car park operator NCP, were also analysed.

The report found organic employment growth of about 1% per annum, faster growth in productivity, or gross valued added per worker, of 7.5% per annum, well above the UK average, and investment in new fixed assets ahead of depreciation.

Ebitda increased by an average of 6.5% per year, while revenues grew by 3%. Seven portfolio companies increased their headcount by more than 20%, while two cut staff by more than 20%.

Simon Walker, BVCA chief executive, said that the report was valuable as it “demonstrates that many of the accusations made against private equity at that time [2003 to 2007] were not – and are not now – remotely accurate . . . Money was not made during these years through “asset stripping”. Indeed, “asset strapping” – acquisitions rather than disposals – were often a central feature of private equity activity.”

Walker downplayed accusations of a reliance on debt, saying that debt did indeed play a role in the value creation process “but not at the cost of either investments or employment”, pointing to strategic and operational improvements.

However, much of the national press has led articles with the finding that more than half of the returns from the 14 companies exited were generated by the use of debt, with 167% of the 330% by which the exits outperformed the FTSE All Share derived from the use of additional leverage, compared with 62% from strategic and operational improvements. The remaining 100% came from benchmarking against stock market growth.

The 28 portfolio companies were acquired for a total consideration of £56bn, of which £15bn was equity and £41bn third-party debt. The 14 exits were initially acquired for a total of £18bn, comprising £5bn of equity and £13bn of debt. The report added that the entry debt level on the 14 portfolio companies was 72% against the FTSE All share comparable of 23%.