There were 83 private equity (PE) exits in Europe last year, the highest number since 2006 and 2007, according to an annual study of the European PE industry by Ernst & Young. You can download a PDF of the study here.
Over the last seven years, the research has shown that 87 per cent of realized investments generated a positive return for investors, while the gross return on these PE investments outperformed investments in comparable public companies by a factor 3.6 times.
Sachin Date (Europe, Middle East, India and Africa Private Equity Leader, Ernst & Young): PE was able to improve productivity by 6.9 per cent per year across all European markets. It created more valuable, fitter businesses, notably in the UK, Ireland, France, Germany, Switzerland and Austria, while also increasing employee numbers at the same time.
The overall picture that emerges from the study is one of improving health for PE. Exit activity grew last year, primarily on the return of trade buyers – who had their strongest showing since 2005 – accounting for 39 per cent of 2011 exits. Creditor exits also continued to decline and PE investments continued to deliver outperformance relative to public markets. And, while the patterns of returns, outperformance and productivity growth have varied across different markets analyzed in this report, the overall conclusion is that the PE model has had widespread success. Selecting investments and driving business improvements have been key to successful PE investment.
PE performance by industry sectors
By industry sector, business services, retail and health care emerge as the best-performing and largest sectors for PE. All three have delivered above-average returns and above-average portfolio growth. By contrast, capital- and consumer-led sectors, such as personal and household goods, have seen below-average performance and growth — in line with lower returns from public companies in the sector.
The business services sector has been particularly successful for PE. It has grown strongly and delivered above-average returns. Deals in this sector are typically smaller than average and the portfolio has a high concentration in the UK, with very few creditor exits.
Among the larger sectors, portfolio growth has been highest in health care. This reflects the attractions of the health care sector as the effect of an aging population in Europe plays out, along with its largely non-cyclical nature and the prospects for further growth of the private sector in many parts of Europe. Its strong growth and above-average returns are in part influenced by a few large deals — most of the rest of the deals in this sector have been at the smaller end, with opportunities emerging from private, corporate and PE sellers.
Retail is the second largest sector in the portfolio, with growth driven mainly by large transactions completed before the credit crunch. The incidence of creditor exits is also low in this sector — one of the contributing factors to the sector’s above-average performance. However, exit activity is below average. Across Europe, PE firms are increasingly organizing themselves by industry sector in order to harness experience, focus on activities and develop in-house expertise. A sector focus strategy often generates better returns than a generalist approach.
The increase in 2011 exits is clearly positive for PE, particularly as the year saw a high level of activity from trade buyers, particularly those outside Europe. So far in 2012, the exit market looks similarly encouraging, with trade buyers, continuing to acquire from PE portfolios. PE needs to take the opportunity of increased overseas interest from the US and Asia-Pacific buyers, to increase its exit pace further, while getting European trade buyers onboard will still remain challenging.
You can download a PDF of the study here.
[Image Courtesy: Ernst&Young]