Study: PE backers in for the long-term

UK-based portfolio companies feel GPs are more willing to provide capital than traditional lenders, PwC’s annual survey on private equity-backed companies has found.

Contrasting an impression that private equity firms are short-term-focused 'strippers and flippers', PwC has found that private equity managers are more likely to inject additional capital into their portfolio companies to help them grow, even more so than traditional lenders.

74 percent of the 94 UK private-equity backed businesses surveyed said their private equity backers were willing to invest further capital, whereas 66 percent said the same about their traditional lenders. More than a third of portfolio companies said lenders were not willing to extend further facilities.

As holding periods have generally increased, GPs are more focused on creating organic growth rather than financial engineering, Duncan Skailes, a partner and UK private equity portfolio company leader at PwC, said in a recent interview with Private Equity International.

“There is no doubt that GPs are focusing on their existing portfolios; nurturing their portfolios and helping their companies to expand and to do add-on acquisitions, because that is a better known investment route than going after a brand new opportunity,” he said. 

The findings indicate the “popular perception of private equity as an investor only involved for short term gains, couldn’t be further from the truth”, PwC said.  “Private equity has been maligned in the media for appearing to extract value from a portfolio company before moving quickly on, but our research into those companies paints a different picture,” Skailes said in a statement.

There is no doubt that GPs are focusing on their existing portfolios; nurturing their portfolios and helping their companies to expand and to do add-on acquisitions, because that is a better known investment route than going after a brand new opportunity.

Duncan Skailes

As well as providing more financing, respondents were also very optimistic about the growth of their business while backed by a private equity house. 90 percent of the respondents expected to maintain or increase their permanent staffing levels in the coming year, compared to 60 percent last year. 

The sectors that are most likely to increase headcounts were retail, leisure and hospitality. The survey showed private equity-backed companies are “optimistic about the future and confident that their backers will support them in their growth ambitions”, Skailes said in a statement. 

Despite the subdued economic conditions in the UK, PwC said the UK private equity industry and the companies it backs remains in good health. 

“There is a large volume of funds still unspent in private equity, as well as a large number of portfolio companies that will see exits. Those exits will demonstrate the ability of private equity and the companies they back to create value and show growth above GDP. That growth will come through the UK economy in more jobs, more taxes and more spending,” James Fillingham, a partner and head of private equity deals at PwC, said in the statement. 

But while portfolio companies were upbeat about further investments from GPs, the study did find some tensions between PE-backed companies and their owners on the exit front. “Sometimes the fundraising dynamics for an individual fund can influence what is happening at the investee company level and that is not necessarily consistent with what the management team in that company wants to do. The fund may decide to sell before the company’s management team believes it’s ready to sell or vice versa,” Skailes said.