Private Equity Consistently Outperforms Public Equities In Europe

By Mani
Updated on

Gross investment returns from private equity-based companies outperformed comparable publicly listed companies in Europe by a multiple of over three times, notes a recent EY study.

In its report titled: “A study of 2013 European exits” EY points out that PE has continued to deliver returns to its limited partners.

Rebound in private equity-backed IPOs

According to the EY report, the big story for 2013 was the return of exits via IPO. Private equity-backed IPOs rebounded to a level not witnessed since 2006, with 13 companies in EY’s sample listing, compared to just 3 in 2012 and 5 in 2011.

Taking a closer look at the exit activity in 2013, the EY report points out that the rate of creditor exits slowed in 2013, and fell to the lowest level since before the crisis. The report notes this encouraging trend suggests that the worst may be behind private equity in Europe.

As can be deduced from the above graph, the third main exit route viz.: trade declined in 2013. Interestingly, despite enhanced confidence among corporates, just 16 were sales to trade, compared with 25 in 2012.

Outperformance by private equity-based companies

Using a long-term lens to track the development of private equity industry in Europe, the EY report notes in the early 2000’s PE really started to heat up, with 2007 turning out be the peak year for the value of deals. This led many to believe that PE would cause a seismic shift in the modern capital landscape. However, in 2008, PE was hit hard by the effects of the financial crisis, the instability of the euro and overall global economic malaise.

The EY report points out public opinion around private equity shifted to extremely negative when PE was blamed for playing a part in causing the economic downturn. However, despite encountering a difficult post-crisis period, private equity portfolios remained resilient and over 2010-13, 79% of all investments returned more than the initial investment.

The EY report highlights that their analysis of gross investment return for exits in the 2005-07 period averages 3.3X invested equity, with a gross internal rate of return of 40%.

Outperformance by PEs

The EY report also drilled down further to analyze by stage of the economic cycle and notes private equity’s ability to add value to portfolio companies through good and bad times. Mirroring the economic cycle, from a high of 3.3X in the pre-crisis era, returns dropped to 2.1X in 2008-09, where they remained in 2010 to 2013 as the effects of the euro crisis took their toll on the PE exits achieved:

Private Equity returns reflecting economic cycle

The report highlights that the private equity model thrives amid periods of exuberance and external shocks as the industry continues to deliver market-beating returns. Striking an optimistic note, the EY report concludes that the outlook for private equity is positive, with the conditions around the industry are improving on all fronts. With greater availability of equity and debt capital for investment, the report notes a shift in the perception of the role of PE has to play in the European economy.

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