Value creation drives private equity's success

The ability to create value at the portfolio company level is a critical driver of private equity funds’ outperformance of public equity markets, according to new research by Private Equity at LBS, supported by Adveq, the private equity​ investor.

In one of the largest studies of its kind, Value Creation in Buyout Deals: European Evidence, London Business School authors Aleksander Aleszczyk, Emmanuel De George, Aytekin Ertan and Florin Vasvari examined a sample of 1,552 European private equity-initiated deals, executed between 1998 and 2014, in an effort to better understand how equity value is created at the portfolio company level.

The report documents that private equity-owned portfolio companies significantly outperform similar non-private equity owned companies in all facets of growth including EBIDTA, sales and assets post-buyout. The evidence indicates that growth and operational improvement strategies implemented by GPs are associated with greater private equity fund performance.

The report also shows that value creation is initiated at the moment of acquisition as, on average, private equity funds pay EBITDA multiples that are more than 8 per cent lower than the valuation multiples paid by public corporate acquirers for similar deals. The discounts achieved by private equity funds are particularly significant at the smaller end of the market, where GPs face less competition. The authors suggest that GPs are likely better negotiators than their public peers, or alternatively that private equity funds typically target undervalued companies.

The study finds evidence that GPs managing smaller funds (i.e., funds smaller than USD 500 million), generate the most post-acquisition sales growth at the portfolio companies, driven by their strategic focus on effective investments in growth and capital expenditures, without increasing leverage. 

Florin Vasvari, Professor of Accounting,London Business School, said: “Our research shows that private equity-owned companies achieve significantly better operating profitability, assets and sales over the first three years of private equity ownership compared with matched companies that are similar but not owned by private equity funds. The results show that while GPs focus on growth they also generate significant operational improvements that likely contribute to that outperformance.”

Sven Lidén, Managing Director and Chief Executive Officer, Adveq, said: “Private equity has consistently outperformed public markets over the last 25 years. The report clearly shows that outperformance and value creation are best achieved by driving operational improvements and implementing growth strategies, particularly at the smaller end of the market. At Adveq our primary focus has always been on this segment of the market, enabling us to unearth value and generate performance for our investors.”

Download the report.