In this gruelling spell for private equity firms and their investee companies, business consultancy Ernst & Young has some good news in the form of a report which reveals that out of 300 PE-backed European businesses sold over the last four years, there was an average of 15% annual growth in profits between acquisition and exit.
The report – ‘Challenges in a new world’ – also reveals that employment grew by 5% and productivity 9%, which the industry will surely welcome given the survey also reveals that exits fell by 66% in 2008 from 2007, with just 30 investments sold compare to 89 the previous year.
Harry Nicholson, private equity partner at Ernst & Young, said: “The decline in the number and value of exits reflected the challenging macro-economic environment, while the drop in exit value can be partly attributed to the difficulty in raising debt as well as the absence of IPOs in 2008. IPOs have typically accounted for 10-15% of exits and are a critical exit route for the largest PE-owned businesses. This has led to a large number of €1bn+ companies in portfolios still to exit and poses a real challenge for the industry in the next few years.”
The vast majority of buyers of private equity assets were fellow private equity firms, with secondary deals making up 74% of all acquirers. Corporate buyers make up 26% and the public markets saw no PE-backed IPOs in 2008. Enterprise values of the companies sold fell from €54bn in 2007 to €12bn in 2008, a 7% drop.
The report’s authors suggest the exit market is unlikely to improve in the short-term, presenting private equity with severe challenges. Private equity funds have a portfolio with businesses worth a total of €600bn, and whilst there has been some money returned to investors, the industry will need to return to the exit volumes seen in the 2006-07 period if holding periods are not to increase, thereby returning less money to investors and making fund raising even more difficult. “Unfortunately, 2009 has brought the worst economic slowdown in over half a century, making this situation even more challenging,” says the report.
The prediction for 2009’s final figures is even fewer exits, divestment through bankruptcy (of which there were none in 2008), and with strong funds already guaranteed returns looking to sell troubled businesses.