How do private equity investors create value? – Beyond the bears
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How do private equity investors create value? – Beyond the bears


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L'étude consacrée aux grandes entreprises européennes cédées par des fonds de private equity entre 2005 et 2009 révèle que les sorties répondant aux critères retenus pour l’étude n’ont concerné que 30 entreprises en 2009. Ce qui démontre que la plupart des fonds d’investissement ont choisi d’éviter de vendre sur un marché défavorable. Voir sur



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Published 01 November 2010
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Language English
A study of 2009 European exits
How do private equity investors create value?
Beyond the bears 
Executive summary
Key findings
About the study
Ernst & Young is pleased to present its  latest annual study on “How do private equity investors create value? A study of 2009 exits.” Now in its fifth year, the analysis provides insight on the performance of the largest European businesses owned and exited by private equity (PE) and now covers a period when the private equity industry has been challenged by unprecedented market conditions.
In this year’s report we have dug deeper into our five-year In 2009, there were 30 European businesses that met our analysis to understand the real drivers of value creation by criteria, which, together with research from prior years, focusing on top quartile performing deals and bottom quartile increases our European sample to over 300 companies with  deals. Our findings support the view that PE is most effective a total entry enterprise value (EV) of almost €200b. In addition when it stays truest to its key tenets. Despite the macro- to gathering publicly available data on these businesses, we have economic challenges, our findings continue to show that the  conducted face-to-face interviews with nearly three-quarters  PE business model creates outperformance when compared of the PE owners to check key facts and to enhance the level  with public company benchmarks. of insight in our research. To properly understand the effect of PE ownership on business As the longest running study of its kind, we believe that our performance, three factors are essential – using a complete and analysis provides additional facts and insight that can add to consistent sample, looking at the whole story from acquisition  the future development of PE in Europe. At a time when the to exit and assessing the key facts. industry sees many opportunities and challenges and greater We have independently identified the largest European businesses s c c o r n u t t i i n n u y e o s f t i o t  s c t o r n a t c ri k b r u e t c e o t r o d  , t  h w e e   d a e r b e a p t r e o . ud that our analysis owned by PE. We have then carried out a detailed analysis of the performance of these businesses – only after exit. John Harley EMEIA Head of Private Equity
Beyond the bears Foreword
Executive summary
A difficult climate In 2009, the uncertain outlook for the economy made financial Our fifth study, Beyond the bears, is set against a backdrop of and trade buyers of portfolio companies difficult to source. economic turmoil that started in 2008 and reached its low Corporate acquirers remained inactive in 2009, with the in 2009. number of exits to strategic buyers well below the historical The most important finding was the ability of PE owners to levels of 2006 and 2007. Corporates tended to be more resist short-term pressures to dispose of investments while cautious and focused on strengthening group balance sheets. valuations were de d. We fir same behavior con p ti r n e u s e s d e into 200 st 9  . s  aw this in 2008, and the fErxoitms  6by7 %s eocf otnhde anriuems baenrd  otfe retxiiatrsi iens  t2o0 n0e8w t oP jEu isnt v7e%s tionr s2 f0e0ll9 , reflecting a lack of financing, focus on the performance of In total, we identified 12 exits in 2009 to trade buyers, PE and existing portfolio companies and a redirection of new investing IPO. This was below the 30 recorded in 2008 and over 85% less to emerging markets. There was one exit by IPO in our sample, than the exit levels in 2006 and 2007. 12 exits from a portfolio the first since early 2007. of over 760 companies (with the same geography and size criteria) remains significantly below expected levels of activity, i.e., assuming a five-year hold period, this would suggest over 150 exits per annum. This ability to resist short-term pressures  is a distinguishing feature of the long-term closed fund structures of the PE business model.
Beyond the bears Executive summary
For the first time in our study, there were a number of exits in 2009 (18) where PE passed control of investee companies to creditors. These exits represented only 2% in number and entry enterprise value of the population of portfolio companies at the beginning of 2009 – a much lower level of creditor exits than some commentators had predicted. Within this small number, our research identified one insolvency while the rest are being run as going concerns by their new owners. In order to understand the profiles of top and bottom quartile deals over the course of five years, we analyzed the characteristics that make a deal perform well and what seems to account for poor performance. Not surprisingly, the results show that the fundamentals count. Top quartile exits between 2005 and 2009 were characterized by PE firms staying true to the PE model. Buying the right companies at the right time, backing strong management teams from the outset and delivering sustained improvements in portfolio companies’ performance were the principal features of top quartile deals.
For more than three quarters of top quartile deals, the PE firms’ As a result, in many of these deals PE ownership did not lead  evaluation of the opportunity started well in advance of the to significant improvements in business performance. formal acquisition process, and in nearly a third of top quartile There have now been two years with low exit activity, and PE deals, this evaluation started more than 12 months before the formal process commenced. Top quartile deals also achieved portfolios have almost doubled in age since 2007 to an average signicant operational and strategic improvements in the toof  3m.a7 nyaegaer sp. oArtsf owlieo r ceopomrptaendi leass tu nyteila irt,  iPs Et her rmigs hwt iltli cmoen ttionue businesses, which accounted for 40% of the return achieved. sell them, even if this means long holding periods. Many PE This stems in part from backing strong management teams from the outset – only 5% of top quartile deals changed their CEO firms remain focused on finding ways of reducing portfolio during PE ownership.tcoo rmepdaunciee sre denbatn lceivnegl sr iaskn.d /Aollr  aerxet seenedikinngg t fhuer ttehrerm  oopf etrhaet iloonaanl s Bottom quartile deals have a starkly different profile. External performance improvements across their portfolio companies. factors, notably the recent economic turmoil, are a key reason We expect the number of exits in 2010 to be above 2008 and for poor deal performance in 2009 exits, for example 58% of creditor exits were in more cyclical sectors. However, there 2009 levels, but to remain subdued versus historical volumes are a number of critical areas that are within PE control. Many and the size of the current portfolio. The outlook into 2011 of the problems encountered by firms in these deals could be s m h a o c w ro s e m co or n e o o m p ic ti o m u is tl m o , o  k b . u I t n i  s t  e c r lo m s s e  l o y f   t b ie u d si t n o e  s a s n   a u n n d c i e n rt v a e i s n t  ment correlated with buying relatively quickly (41% of these deals performance of 2010 exits, we expect to see a wide range of  were assessed only at the start of the formal sales process). Poorer performers were also subject to much higher rates toeurtmc,otmhees   nrdeinegcs tionf go buro trhe smeaarrckeh t caonndti innutee rtno adl feamctoonrsst.r aLtoen  g of CEO change, with 41% replaced during the hold period. This suggests that, in these deals, PE did not back the right out-performance of PE-owned businesses. management teams and/or the right strategy from the outset.
Beyond the bears Executive summary
Key ndings
2009 exits Figure 1: Total exits 2005-09 by number  Ernst & Young’s 2009 study shows that exits from PE portfolios Despite the tough conditions, PE managed some positive IRR and value remained subdued at 2008 levels. This is no surprise given  exits during 2009. Corporate acquirers maintained their 2008 120 the effects of the financial crisis and consequent recession  level of activity in 2009 representing 30% of the total number 100 100 89 on the economy last year. Potential buyers stayed at the of exits, although the number is well below historical levels. The 80 69 66 sidelines, constrained by difficult conditions on the financial number of exits to PE firms fell markedly, however, to 7% of the 60 54 markets, along with a wide gap in price expectations between total (vs. 67% in 2008), reflecting the difficult debt markets 40 31 30 30 21 vendors and acquirers and reluctance to acquire at a time of and the fact that many were concentrating on their existing 20 12 economic uncertainty. portfolio companies. The end of 2009 saw the first IPO in our 0 2005 2006 2007 2008 2009 There were 30 exits in 2009, the same number of exits as in sample since the first half of 2007, which should be seen in the Number Entry EV 2008, a sharp fall from previous years. Given the size of the lcaounntcehxte dt hoant , sotovecrk alml, a2rk0e0ts9  isna Ewu trhoep leo swinecste  n2u0m0b3.e rJ uofs tc oUSm$p7a.n4ibes PE portfolio is some 760 companies, this sharp slowdown in was raised in 62 deals i 2009, down 56% from 2008 1 .  realizations demonstrates the decision made by most PE owners n to hold onto their portfolio companies and avoid selling in Figure 2: Who sold to: PE Exits 2005-09 adverse market conditions. This is perhaps the most significant finding – that the PE business model offers protection against short-term risks: PE can, in most cases, choose the best time  100 10 2 0 to realize their investments. 18 8 4 9 80 69 60 8 25 28 26 40 30 30 55 57 20 35 1018 20 1 9 0 2 2005 2006 2007 2008 2009 PE Trade IPO Creditors/Banks
1  Shifting Landscape — Are you ready?   Global IPO trends report 2009, Ernst & Young LLP
Beyond the bears Key findings
Exits to creditors were much lower than predicted We have sought to understand which sectors were The emergence in 2009 of a number of PE exits to creditors for prone to failure and why. Our sector analysis detailed t t h h e e n u rs m t b ti e m r e o  f s  i s n u c c e h   o e u x r i  t s s t  u w d a y s  i b n e r g e a a n l was f  a a r n l t o ic w i e p r a  t t e h d a , n   a s lt o h m o e u  g h h a  d iwn ereg iunr e m3o sreh ocwysc litchaalt i n5d8u%s torfi tehs,e  scurcehd iatso rC eoxnitsst riun c2ti0o0n 9  predicted with no strong bias to a pa i r t t y i  cular year of acquisition. & Materials. This is a high percentage, given that these more cyclical sectors make up just 12% of PE’s total We commented in our 2008 study that, contrary to public portfolio. perception, PE continued to look after their troubled investments. This position was sustained in 2009 as PE offered to inject new money into 60% of situations of creditor exits, reinforcing the view that these businesses had long-term potential. Even though equity holders lost money, only one of these went into insolvency with the rest being operated as going concerns by their new owners.
Beyond the bears Key findings
Figure 3: Total PE portfolio company entry EV vs. public market EV by sector cyclicality in the UK, Germany and France, 2007 Chart excludes Financial Services, Oil & Gas and Real Estate sectors: 34b of EV for portfolio companies vs. 302b shown and 6.8tr of public markets vs. 6.4tr shown. 70% 60% 50% 40% 30% 58% 63% 20% 21%21% 25% 10% 12% 0% High Medium Low 2009 exits to creditors PE portfolio com panies
High = Automobiles & Parts, Construction & Materials, Personal & Household Goods Medium = Chemicals, Industrial Goods & Services, Media, Retail, Travel & Leisure Low = Food & Beverage, Healthcare, Technology, Telecommunications, Utilities
Figure 4: How far in advance firms evaluated  a potential target 2005-09 100% 90% 24% 80% 41% 70% 60% 26% 50% 40% 19% 32% 30% 12% 20%31% 10% 0% Top Bottom quartile quartile Longer term Within 12 Within 6 Start of  months months formal process
What makes a deal perform well? Putting the time in up front We analyzed our five years of aggregated data to reveal the From 2005-09, the best performing deals were those where difference in characteristics between the top and bottom the PE firm was able to spend substantial time identifying and quartile deals. The most striking finding is that the most evaluating the opportunity in advance of the formal purchase successful deals are those that followed the tried-and-tested PE process. For more than three-quarters of top quartile formula of buying good companies at the right time, backing the deals, the PE firms’ evaluation of the opportunity started in best management teams and improving operating performance. advance of the formal process, and in nearly a third of top Nearly all of the worst performers failed on one or more of quartile deals (31%) this evaluation started more than 12 these counts. months before the formal process commenced. This meant that they were better able to assess whether the business External factors was sound, had a strong management team and had good Our ret rns attribution shows that 30% of the gross investment growth prospects. It also gave opportunity to hone their return oun PE deals comes from additional leverage (over public strategy for improving the business well in advance of buying it and execute performance improvement plans effectively in company benchmarks), 30% comes from public stock market conjunction with the management team. return and 40% from PE out-performance. So external factors matter, but they cannot explain all of the variation in deal By contrast, 73% of deals in the bottom quartile were first performance. assessed no more than six months before the formal process started, and for 41% this assessment only occurred from the Top quartile deals got the greatest stock market return, while start of the formal process itself. This shortage of time may bottom quartile deals in aggregate had a negative stock market have led to a hurried analysis, with the result that problems Irne touurrn i. nSteercvtioer wselection eacntde tdimdionwgn smidatet reirs tkos  PwEe rien vgeisvteonr s. were not identied or fully understood early on, such as a lack s, unexp of customer loyalty to products and the impact of competition gdreeaal tpeer rfwoerigmhting  t hlaarn guenlye xrepecetcetidn ug ptshied eism ipna ectx polfa itnhien gw orst from new entrants. This is already leading to a change of recession for a d n e c c e ades in 2009 that few accurately f In practice in the industry, with ever more emphasis being addition to demand risks, movements in commodity o  r m e a s r a k w e . t  s placed on the commercial and operational imperatives of each have also impacted margins. investment opportunity. Overall, however, the variation in performance between top and bottom quartile deals is more explained by PE outperformance than market factors.
Beyond the bears Key findings
Improving business performance However, the fact that the bottom quartile deals have a high Figure 5: Frequency of change of CEO for top and Our analysis of the best performing deals demonstrates that level of CEO change demonstrates the active ownership that is  bottom quartile PE Exits 2006-09 where PE rms followed their established operating model, they ao fh PalEl,m tahrek  foaft et hoef  tPhEe  bbuussiinneessss emso idnevlo. lvWeitdh omuaty t hhae veen bgeaegne mwoernst e. tended to be most successful. 100% 5% 8% 90% Time spent analyzing the opportunity in advance clearly paid 80% 21% dividends for the top performers. In these deals, PE owners T T h h e e r  e e i f s f  e al c s t o   o a f n  i m n p a a n c c t i o a f l   l l e e v v e e r r a a g g e e on the top quartile versus 70% 33% in conjunction with management teams were able to execute 60% performance improvement plans effectively. Meanwhile, those bottom quartile deals. PE investments tend to have higher 50% 24% that performed less well often struggled to implement their financial leverage than public companies. This additional 40% 74% plans, either because the business could not support them or leverage boosts the return on investors’ equity in the best 30% because management was unable to execute them. deafls,r bmu pt oalosrol ye. xacerbates negative returns when investments 20% 35% Strategic and operational improvement is an area of increasing per o 100%% emphasis within the PE industry with more PE rms hiring Tqhuea rdtialte ap sehrfoowrsm tahnact et hise  pkreoy t ngarnocwitahl d rOiuvre ra onfa ltyospi sv ds.o beso tntootm  Top quartile Bottom quartile operational partners and teams, together with external advisors . and senior executives, who apply industry expertise as senior link higher leverage per se to bottom quartile performance: the No change Changed at startChanged duringaCnhda ndguerdi nagt start advisors to firms. leverage ratio at acquisition for top quartile deals was 70%, and for bottom quartile deals 71%. The debt multiples (ratio of net Management, management, management tdoepb tq tuoa rEtiBlIeTdDeAa)l sw, e4r.e6 ,h ibguht etrh fiso rw baost tdouem  tqou hairgtihlee r daecaqlsu,i s6i.ti4o, nt han  Backing the best managers is one of PE’s key tenets, and the prices and are little different to the average for the whole research highlights this. Only 5% of top quartile deals changed sample of 5.8. CEOs during the hold period, versus 41% for bottom quartile deals. Backing top management teams or identifying them  and putting them in place at the outset are clearly important factors in ensuring a deal performs well. Without strong leadership, implementing performance improvement plans  is difficult at best and impossible at worst, particularly during times of economic stress. Again, success in this area is likely  to reflect time spent before the acquisition process getting  to know management and understanding their strengths  and weaknesses. Beyond the bears Key findings 7