”Overall, our study finds that North American PE is now making significant progress in exiting its portfolio, with a better trajectory than has been seen in some time,” according to the annual study from the transaction advisory services division of Ernst & Young. The seventh report in the series, Returning to safer ground: How do private equity investors create value? A study of 2013 North American exits, takes a look at exits from 2006 to 2013 of sponsor-backed North American companies with entry enterprise values of at least $150 million.
All told, citing data from PitchBook, Dealogic and its own research, the study counted 169 exits from sponsor-backed North American companies with collective enterprise values at entry time of $203 billion last year. Both marked all-time highs over the eight years studied. The big year for exits continued a two-year trend of exits outpacing new deals, and a five-year trend of falling total entry enterprise values of companies still held in portfolios. That collective value, which peaked in 2008 at $871 billion, fell to $718 billion in 2012 and to $659 billion in 2013.
IPOs were a big part of the exit scene last year, representing 61 percent of total entry enterprise value of exits and 38 percent by number, the study found. (An IPO in which the sponsor did not fully exit counts as an exit for purposes of the study.) The wide-open IPO window helped buyout firms solve the tricky problem of how to exit from the abundance of large, heavily leveraged deals consummated in the run-up to the 2008 financial crisis. Nearly a third (30 percent) of exits via IPO last year had entry enterprise values of $1 billion or more, according to the study; 22 percent had entry enterprise values of $2 billion or more. Added the study: ”In an encouraging sign of a market in recovery, exits of large companies via M&A (to strategics and PE) were up signficantly last year.”
At the same time, IPOs pose a risk for buyout firms in light of how holding periods have been dragging out. According to the study, sponsors sold 16 percent of their shares in IPOs in 2013, down from 43 percent in 2008. The study found that ”the post-IPO period has now clearly become a much more important determinant in a deal’s success than the initial offering. A key concern is that this increases the exposure of PE returns in IPO exits to public market volatility.” In all, the study found that for exits via IPO from 2006 to 2013, 81 percent of the value realized came from follow-on issues rather than IPOs.