Capital Dynamics, a global private asset manager, and the Technische UniversitÄt MÜnchen have announced their joint findings from a second study of realised private equity investments that shows operational improvements remained the key driver of value creation in private equity.
The current study expanded the data set to include 701 global private equity exits from 1990-2013 compared to 241 mostly European exits in the first study conducted in 2009. The new data set provided insight into how value and alpha are created across private equity deals and delivered an updated picture of value creation in the private equity industry. Results showed that operational improvements were the key drivers of value in private equity portfolio companies and, along with the multiple effect, accounted for 69 per cent of value created.
In spite of commonly held views that the use of leverage fuelled returns of private equity deals made during the last buyout boom from 2005-2008, the study found that value creation attributed to leverage was less than in deals made during the pre-boom years of 2001-2004. Moreover, EBITDA growth contributed more to value creation in boom era deals than in pre-boom era deals. The study also found that market timing was less important for value creation than GP-driven multiple expansion, as the latter accounted for most of the value created from the multiple effect.
Value creation in private equity remains operationally-driven, accounting for roughly half of overall value created.
A noticeable shift occurred in the sources of value creation in 2005-2008 deals: Leverage contribution diminished, while operational factors such as EBITDA growth became the major drivers of successful value creation.
Market timing is overvalued: The multiple effect accounted for 18 per cent of value created, with public market movements contributing 40 per cent and GP-driven multiple expansion comprising 60 per cent of that.
Private equity operational alpha increased to 14 per cent, driven by stronger EBITDA growth of private equity-backed companies compared with public benchmark companies.
"Our results demonstrate that private equity delivers value to investors over and above public markets and beyond the application of leverage to transactions. Value creation analysis has long been an important part of our investment due diligence process and helps us benchmark GPs in terms of value creation abilities," said Dr.
"Operational improvements in portfolio companies and multiple expansion by skilled GPs result in generation of value for investors in this long-term asset class," said Dr.
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