Private equity value creation in Europe
After a record year for European exits in 2015, a two-speed PE industry emerges
Our series of studies of European private equity-backed (PE-backed) businesses, conducted over the last 11 years, has demonstrated PE’s capacity for value creation — in absolute terms and in performance relative to public company benchmarks.
- Strong activity in exiting and investing in 2015 show the industry returning to healthy levels of activity
- Aggregated gross equity returns continue to show out-performance of PE-backed businesses, relative to public company benchmarks, and after adjusting for financial leverage
- Behind the overall industry trend, a two-speed industry is emerging
- The GPsthat are quicker to implement value creation protocols and subsequently exit, are being rewarded by LPs with new funds for new investments - so that the GPs’ portfolio age remains below 5 years. This group is out-pacing industry growth
Improved investor sentiment and macro improvement in Europe in 2015 led to a record-breaking year for PE exits. There were 121 exits in Europe during 2015, far surpassing even the peak years of 2006-2007; moreover, the value of exits also matched the previous all-time high recorded just a year earlier.
These exits were achieved across all three primary PE exit routes - trade sales, IPOs and secondary buy-outs - reflecting confidence in the broader market environment but also showing PE’s ability to identify realization opportunities across the board.
Strong activity in 2015
European PE exit activity reached record highs in 2015, following on from a strong 2014.
M&A exits at record high
Worldwide M&A deal values totalled more than US$5t last year, surpassing the 2007 peak. Exits via trade sales reached an all-time high, and sales to other PE houses were also at healthy levels.
Healthy activity levels returning
European PE exit activity in 2015 reached the 20% level (of the opening portfolio value) that marks a healthy industry, i.e., an average five-year holding period. New deal activity is also increasing.
Why does age matter?
One of the consistent findings in our studies is that gross returns generated by PE investors decline with length of holding period. There is a steady decline in IRR as holding period lengthens, from 28% in four to five-year holds to 15% in those with holding periods of greater than five years. PE outperformance also declines with holding period.
A two-speed industry
Our analysis uncovered one factor that can explain the differential in the health of the industry — the speed with which individual PE firms (general partners) are able to generate and then realize value in their portfolio companies.
LPs looking to the long term
The downturn appears to act as a watershed period for returns and activity levels. The stark difference in average portfolio age between the two groups will lead to a material disparity in realized returns as the current portfolio is exited, already factored into LPs valuations. The young portfolio GPs account for 60% of the current portfolio and 82% of new investments in 2015, so their share of the industry will rise.