• Industry: Private Equity
  • Type: Survey report, White paper
  • Date: 1/14/2013

Ways private equity firms can genuinely add value 

Ways firms add value
Private equity returns continue to outstrip quoted shares and it is certain that operational improvement in portfolio companies is a key component of value creation. Of our sample, 63 percent had been involved with a private equity-backed business which was subsequently sold and, of these, 77 percent had been sold for a profit.

According to the survey, the most important contributors to the value uplift were operational improvements and sales growth. Leverage and growth through acquisitions were much less important; highlighting perhaps the reality of the more difficult funding climate.

Chart 1

Approximately 40 percent of the respondents credited private equity with contributing more than a quarter of the value uplift achieved on exit. This is a clear indication that private equity is capable of generating a significant amount of value. For the rest of respondents who estimated the value uplift at 25 percent or less, this still represents material incremental value which contributes to private equity’s ability to outperform public markets.

Where private equity made a significant contribution to the value uplift, it was said to be through the following means, in rank order:

  1. Provided capital to grow business
  2. Optimized business plan
  3. Removed constraints on management
  4. Brought in operational expertise
  5. Other (including dealing with banks)

The finding that the majority of our sample ascribed a moderate figure to private equity’s contribution to value uplift may surprise private equity executives – but not management. In their eyes, private equity backers are viewed as enablers; meaning that their ability to contribute value is focused on areas such as providing access to capital and bringing a greater focus to achieving an exit. Management, and for that matter non-executive chairmen, tend to believe that real value creation comes from growing the business and improving profitability – and this is down to the executive team.

However, respondents acknowledged that in some cases, private equity directors are able to make much greater contributions – in the range of 30–50 percent of the uplift in value.

We should point out that respondents’ views on the contribution private equity firms make to value uplift were estimates and not usually based on detailed analysis.


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