Friday Letter Operational experts shine in PEI awards

Browsing through the winners of PEI’s 2011 awards, one thing becomes apparent: the winners are by and large firms with a demonstrable ability to operationally improve portfolio companies.

There’s a long list of clichés in private equity. As any limited partner will tell you, you’ll be hard pressed to find a firm whose deals aren’t proprietary, whose fund isn’t top-quartile and whose professionals have no idea how to “add value” beyond finessing capital structures.

It’s become increasingly apparent however, that firms unable to substantiate such assertions will find it tough going both on the fundraising front and in managing their existing portfolio companies through difficult market cycles.

So with that in mind, it’s perhaps unsurprising that firms with a focus on value creation through operational improvement were honoured by peers in Private Equity International’s 2011 awards.

Take the 2011 large-cap firm of the year in North America, Silver Lake Partners, for example. Silver Lake achieved what’s been called one of the most successful private equity exits ever last year – its $8.5 billion sale of Skype to Microsoft – accomplished largely by helping a business that was not getting the attention it deserved from its corporate owner to realise its potential. Silver Lake led an investor consortium that paid $2.7 billion to buy a 65 percent stake in the company from eBay in 2009.

Under the consortium’s ownership, Skype increased its user base by 78 percent to 170 million connected users; managed a 150 percent-plus increase in monthly calling minutes; achieved an enlarged share of international calling volume (up to 20 percent from 13 percent); and implemented a quicker, more efficient product release cycle, reduced to 60 days from up to 180 days.

Those improvements yielded results where it matters most – on the balance sheet. Earnings before interest, taxation, depreciation and amortisation rose 72 percent in the year ending 31 March 2011 to $268 million. After the improvements, the Silver Lake-led group sold its stake in Skype in a deal that valued the company at 32 times its 2011 EBITDA. Its investors, including Silver Lake, more than tripled their money.

Across the Atlantic, EQT Partners – winner of the large-cap firm of the year in Europe and also firm of the year in the Nordic region – also enjoyed a bumper exit, offloading security company Securitas for €2.3 billion in one of the biggest European disposals of last year. That represented more than twice what EQT paid for the company in 2008 when it took it private.

EQT made a host of improvements to the business during its three years of ownership. As well as growth through bolt-on acquisitions, the company more than doubled its customer base in France as well as expanding into Chile and Brazil. EQT helped it to weather the economic storm in Southern Europe through active customer portfolio management in Spain and Portugal, and also improved its cash management culture.

As a result, Securitas’ EBITDA increased by 20 percent during EQT’s period of ownership. It’s performance like that which no doubt helped to persuade investors that EQT’s latest buyout fund was worth committing to. Raising a €4.75 billion fund in a difficult market was no mean feat, and illustrates the point that LPs are looking for groups with demonstrable operational expertise, not just empty promises.

It’s not just Silver Lake and EQT that have demonstrated their ability drive growth through operational improvements either. Right through the list of winners, and indeed the runners-up, are groups that have operational expertise as part of their DNA: firms like Bridgepoint, winner of the European mid-cap firm of the year award, or General Atlantic in the corresponding North American category.

Of course there are different trends to be teased out of the list of winners each year – but there’s a particularly keen sense that operationally-focused firms will continue to stand head and shoulders above the crowd in years to come. To that end, expect to see the trend continue into next year’s awards list!