Boston Consulting report is positive on PE

A research report from one of the world’s largest consultancies argues that private equity’s success is sustainable and not dependent on the debt markets.

The impact of the rising cost of debt on buyouts is overblown, according to a recent report, which instead highlighted the sustainable superior performance driving investment in private equity.

Current credit spreads are near the long-term historical average and are at the same level as 2005, while value creation is increasingly more a result of operational improvement than debt arbitrage, it noted.

The report, by the Boston Consulting Group and the IESE Business School of the University of Navarra in Spain, showed the best firms in the asset class “beat the fade”, or do not move towards average performance over time like the vast majority of public companies.

Because beating the fade is so difficult, the odds are against investors trying to predict future performance using historical information. However, the report found private equity firms with above-average performance seem to persistently maintain that performance over time.

The increasing allocation to private equity by pension managers and ownership stakes taken by sovereign wealth funds is evidence of strong ongoing commitment to private equity on the parts of institutional investors it said.

However the report said private equity returns, when adjusted for risk, are roughly the same as those from the public markets. 

Boston Consulting and IESE concluded that structural factors including size, geographic diversification and industry diversification have very little correlation to performance.

The report determined distinctive organisational capabilities are the key contributors to performance with three being particularly important: extensive networked access to industry players; highly specialized domain expertise and consulting and operational management expertise needed to produce operational improvement.

The report “The Advantage of Persistence: How the Best Private-Equity Firms ‘Beat the Fade’” is the first output from a joint research project on the performance of the private equity sector.