Productivity up, employment down at UK portfolio companies

The latest report stemming from the Walker Guidelines found large UK private equity-backed companies have been outperforming on productivity, while having reduced organic employment.

A portfolio of large private equity-backed companies has outperformed public company and UK company benchmarks over a one-year period, but did not add as many employees as listed equivalents.

The second annual report on the performance of the largest UK companies owned by private equity firms found their annual productivity growth to be much higher than UK companies as a whole over the same period. The report, produced by the British Venture Capital Association and Ernst & Young, was borne out of recommendations in the Walker Guidelines for Disclosure and Transparency in Private Equity.

The news on employment was not quite so favourable. In the financial year under investigation – which ended in December 2008 for some companies and March 2009 for others – overall employment growth for public companies was 5.2 percent, compared with 0.1 percent for private equity-backed companies. Measured organically (with the effects of acquisitions and disposals stripped out), the private equity-backed companies saw a small decline of 0.2 percent over the period. The rate of decline in UK jobs overall was, however, slightly higher.      

The claim that private equity is in the business of making swingeing job cuts is not borne out.

Harry Nicholson

The survey also found that the private equity portfolio firms had completed more bolt-on acquisitions than disposals during the period, their capital spending was greater than depreciation and their spending on R&D was increasing.

According to Ernst & Young partner Harry Nicholson, the survey showed that private equity firms were not the job cutters and asset strippers of popular myth. “The survey is not about saying private equity is wonderful – it is about discovering whether there is anything to the most negative claims made about the asset class. The claim that private equity is in the business of making swingeing job cuts is not borne out.”

The best news for the private equity firms lay in what Nicholson described as its “huge” out-performance – a 7.7 percent increase in annual productivity growth compared with 1 percent for UK companies as a whole. The greater productivity growth of the private equity portfolio compared with public companies means that – combined with very similar revenue growth – profits growth was also higher for the private equity-backed firms.

Nicholson speculated that the out-performance acted as a partial vindication of the private equity model, which he described as a “powerful alignment of interests around clearly definable goals that are shared by all”. However, he said it was also a function of selection, that is, “picking businesses where these kinds of improvements are possible”.

Nicholson added that the next report, which will cover the bulk of 2009, will be “interesting”. “There has been widely publicised pressure on the balance sheets of some private equity-backed companies and some restructurings. We’ll see next year the extent to which financial distress creates operational distress.”

The report analysed 47 portfolio companies meeting the Walker Guidelines criteria, compared with 28 in the first report. The companies were acquired for a combined £82 billion and employ 353,000 people.