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EVCA survey: buy-outs secure survival, boost performance

84 per cent of companies polled say they would no longer exist or have grown less quickly had they not undertaken a venture-backed MBO or MBI.

According to research published today by the European Private Equity and Venture Capital Association (EVCA), venture-backed management buy-outs and buy-ins lead to better than average performance, competitiveness, increased employment and remuneration, greater employee involvement and significant overall added value.

The survey, conducted by the Centre for Management Buy-out Research (CMBOR) at Nottingham University and sponsored by PricewaterhouseCoopers, polled 300 European companies that undertook buy-outs between 1992 and 1997. The companies responded to detailed questions about the reasons for their buy-outs, changes adopted in running their businesses, performance post-MBO and the role of the venture capitalists financing the transactions.

The findings suggest that the contribution of the venture capitalist is crucial to the success of a buy-out, both in terms of making it happen and in terms of the contribution made in the post-buyout period. 84 per cent of respondent companies said that they would no longer exist or would have developed more slowly without the venture-backed buy-out.

“This survey confirms what we have believed all along”, says Jonathan Russell, chairman of EVCA’s Buy-out Committee, “that the venture capitalist provides a value added investment by contributing more than simply finance. The venture capitalist also provides strategic advice and acts as a sounding board for management ideas.”

Some of the survey's key findings are:

  • Two thirds of respondents reported that they had out-performed their competitors over the 7-year period of the study.
  • 60 per cent had expanded their workforce since buy-out, with the average increase being 47 per cent.
  • Buy-out investment is used to increase long term developments such as R&D, marketing, training, and capital expenditure.
  • Buy-outs result in changed attitudes towards employees, with managers recognising the importance of involving all employees, and performance related pay extending on average from 16 per cent in the year before buyout to nearly 37 per cent. The number of employees with share option schemes in responding companies rose fivefold to just over 10 per cent.
  • Post buy-out performance showed significant increases in turnover, proving that existing, competent management can translate their expertise into improved performance, given the freedom to do so. Turnover growth went from less than 10 per cent in the year prior to the buy-out to more than 15 per cent in the 2-3 years following the buy-out. The average annual growth rate across the whole sample increased by 84 per cent from the year before buy-out to the third year after buy-out.
  • Venture capitalists are considered to make a high contribution to the businesses they invest in not only in monitoring financial performance, but also in non-financial areas. Acting as a sounding board for management ideas, monitoring operating performance and the provision of strategic advice for example are all key areas where VC involvement is deemed by the buy-out company to have been crucial to the buy-out’s success.
  • Since 1990, the acquisition of companies by teams of managers has become a significant feature of the European private equity market. Investment in buy-outs grew by over 150 per cent between 1992-1997. By 1999, buy-outs represented 53per cent of the year’s total European private equity investment of E25.1bn.