A new study of North American private equity (PE) by Ernst&Young reveals that growth strategies are “in” and cost-cutting and value-preservation are “out”. This shift has set the stage for positioning companies well at the outset of the deal to achieve successful, higher value exits while also driving higher returns, according to the value creation study.
In a volatile M&A environment, PE firms have consistently proven to be opportunistic investors, utilizing readily available financing to acquire businesses and refinance portfolio companies, says E&Y.
As a result of the value creation strategies and organic revenue growth, returns are outperforming comparable public market returns. For exits in the 2006 t0 2012 periods, PE has outperformed by a factor of 5.4, with PE’s strategic and operational improvement initiatives driving a large proportion of the overall return.
In Europe, PE has outperformed public markets by a factor of 3.5 for exits over the eight-year period from 2005–12, with PE’s strategic and operational improvements accounting for the largest component of returns.
Similar results were found in emerging markets. E&Y’s study of value creation in Africa, for example, found that PE value creation generated returns of almost double the Johannesburg Stock Exchange All-Share Index, and in Latin America, PE outperformed the iBovespa index by a factor of 2.4.