The first annual report on the performance of the largest UK companies owned by private equity firms reveals that the use of debt in acquisitions vastly increases the percentage of gross investment return.
The British Venture Capital Association and Ernst & Young analysed 28 private equity-owned portfolio companies and a further 14 exited portfolio companies in the study, which was recommended by the Walker Guidelines for Disclosure and Transparency in Private Equity. The Walker guidelines were established in 2007 by David Walker.
Analysis on private equity portfolio exits during 2005 to 2007 found that aggregated returns on the gross
investment was 3.33 times or 330 percent that of the FTSE All Share benchmark, or average UK listed company in the same sector and time frame. Fitness First and Debenhams were among the portfolio exits reviewed.
On top of the benchmark, which is set at 100 percent, the portfolio exits achieved a further 170 percent from additional financial leverage, reflecting the benefit to the equity return from the higher share of debt in the capital structures of the private portfolio exits compared to the listed companies.
The additional 60 percent increase can be explained by operational performance improvements in the private portfolio companies, the report found.
Although the conclusions reflect positively for private equity, the investment return findings are “still not big enough to draw substantive conclusions” the report said, given that the analysis is limited to 14 exits. BVCA chief executive Simon Walker said in a statement that the report “concentrates on a small although still significant number of companies”.
The study also reports positive activity among the 28 non-exited private equity owned companies such as women’s clothing retailer New Look, supermarket chain Somerfield and breakfast cereal manufacturer Weetabix.
“The results to date aggregated across all the portfolio companies, show that under private equity ownership there has been organic growth and profits. […] There has been organic employment growth of around 1 percent per annum and 7.5 percent faster growth in productivity per annum,” Harry Nicholson, a partner at Ernst & Young, said in a statement.
The survey has further highlighted the importance of lending on a day that the British government announced plans to guarantee up to £20bn of loans to small- and mid-cap firms in the UK in a bid to help them survive the credit crunch.
In response to the move by the UK secretary of state for business, Peter Mandelson, Simon Walker said, “A serious strategy for recovery must involve the banks actively supporting existing companies and backing others, such as private equity investors, who would like to come to the rescue of ailing and failing firms.”