A recent follow-up to a 2009 study of buyout exits finds that EBITDA growth accounts for 41 percent of value creation in deals, while altogether EBITDA growth along with related operational improvements account for about half of value creation. The contribution from EBITDA growth was up 10 percentage points from the earlier study.
At the same time, leverage accounted for 31 percent of value creation. That was down from 33 percent in the 2009 edition. Value creation from changes in acquisition and exit multiples, commonly known as the multiple effect, or multiple expansion (or contraction), accounted for 18 percent of value creation, down 1 percentage point from the previous study. (Part of multiple expansion comes from rising prices in general; part comes from the ability of sponsor to “improve asset quality,” according to the study.)
The new study, by Swiss fund-of-funds manager Capital Dynamics in partnership with the Technische Universität München, took a look at 701 buyout exits around the world from 1990 to 2013, including 55 unsuccessful deals where value fell over the holding periods and excluding outliers. The 2009 study looked at 241 exits, mainly in Europe.
The 2014 study also debunked a common misconception by looking at value creation during different time periods. The prevailing view has been that leverage played an especially big role in value creation in the run-up to the financial crisis of 2008—a time of especially aggressive lending practices. But, in fact, the study found that leverage accounted for just 29 percent of value creation for deals done during the “boom” years of 2005 to 2008. That was lower than for the entire range of deals studied. It was also lower than for “pre-boom” deals done from 2001 to 2004.
“Despite higher entry leverage, strong EBITDA growth during the holding period enabled substantial reduction of leverage until exit,” according to the study. ”While EBITDA contribution to value creation was 31 percent for pre-boom deals, it increased to 40 percent for boom-year deals.” That said, the study found less value creation overall, from all sources, in boom-year deals than in pre-boom-year deals.
Meantime, the study had good news for sponsors trying to convince investors that they beat the public markets. “The unlevered annual returns of private equity exceeded those of public benchmarks by 14 percentage points,” the study said.