Private equity is alive and kicking
The private equity business model is a robust and active form of ownership that drives growth in the companies it backs. This is one of the conclusions of the Ernst & Young study “How do private equity investors create value”? Alain Kinsch, Country Managing Partner for Luxembourg, said at a press conference that private equity backed businesses should continue to outperform publicly quoted companies.
Ernst & Young’s sixth annual study, entitled “return to warmer waters”, is set in a context of improving economic conditions although corporates are still cautious regarding mergers and acquisitions. There was a significant upturn in the number of exits achieved by private equity investors. They rose from 31 in 2009 to 57 in 2010 as private equity was able to turn a more favorable environment to its advantage.
Despite the improvement in 2010, the difficult conditions have resulted in a further ageing of portfolios. The average holding period of companies that exited in 2010 was 4.7 years, compared to 3.7 years prior to the credit crunch (2005-2007).
The Ernst & Young study demonstrates that private equity continues to out-perform comparable public companies across most sectors and regions. Alain Kinsch underlines that for the period between 2005 and 2010 private equity exits performed three times better than comparable stock market performance.
He adds two telling figures which clearly demonstrate the value of private equity investments. “ 88% of companies exited by private equity firms are sold at a higher price and, what is more, there is a 68% correlation between a higher return and organic growth.
Alain Kinsch emphasises that it does matter where performance is coming from. Organic revenue growth is by far the largest contributor to profit growth for the period 2006-2010. According to the Ernst & Young study, over half of this organic growth comes from initiatives that changed the business model or strategies like repositioning a company in the market, developing and selling new products and expanding geographically.
Mr Kinsch, who is also Ernst & Young’s Private Equity Funds Leader for Europe, Middle East, India and Africa (EMEIA) is convinced that the positive trend of the private equity industry will also profit Luxembourg.
“Luxembourg is well positioned to take an important market share. Our contributions are the investment vehicles used for private equity and the know-how within banks, law firms, the Big Four and many others.” He adds that the rapid implementation into national law of the Alternative Investment Fund Managers Directive (AIFM) will hopefully drive more business to Luxembourg. CW