Private equity emerges as a force for growth

3 November 2011

Grant Thornton today releases a new report showing how a turbulent global economy is transforming the private equity industry. The sector, often criticised for a lack of transparency and for a focus on financial engineering, is emerging as a real force for growth with its focus on performance improvement and enhanced levels of governance. But, given the increasing competition for quality assets, increasingly discerning investors and the continuing  economic uncertainty, the report concludes that there will be private equity winners and losers.

The report, based on interviews with private equity professionals across the world, highlights that the private equity sector has rolled up its sleeves and now exhibits a very hands-on approach with portfolio companies. Nearly half (44%) of firms now view performance improvement with portfolio companies as the main way to drive value (22% of practitioners expect to be more hands on in the future). Private equity firms are driving value by becoming involved in key management functions such as strategy (46%), financial planning (35%) and human resources (30%). With debt markets still constrained, financial engineering’s role is now negligible, with just 2% of those interviewed citing it as a value driver.

Martin Goddard, global leader – transactions, said: “Over the last three years, we’ve seen the private equity model evolve to meet a new set of challenges. Investors have become more analytical, demanding transparency from private equity partners – a sentiment echoed by regulators and the public. Investors want growth, but they also want to know how it’s being delivered and to have the assurance that it’s being achieved in a responsible way. Given the economic backdrop in the developed economies, private equity can’t look to market growth to drive value.  This means that there’s a pressure on practitioners to really perform and build demonstrable track records in order to prosper.

“The competition for deals has also intensified. Not only are firms contending with domestic and foreign private equity players, but trade buyers are adding to the tension and pushing prices upwards. Not all private equity firms will survive these challenges. While private equity firms rarely fail and disappear overnight, a period of Darwinism is likely to continue for some years to come. Successful firms are likely to have addressed the need to add value and drive growth in their portfolio companies.

“What we’re seeing is private equity beginning to live up to its promise. But the sector as a whole still needs to work harder to improve its reputation, countering suspicion and ignorance, by demonstrating that it is socially responsible and by explaining the value it can deliver. If this research highlights one thing, it’s that the sector can be part of the solution to our current economic difficulties rather than part of the problem. For that reason the private equity industry needs support.”

The report also reveals a tough environment for fundraising. Globally, there is more negativity than positivity about the outlook (46% vs. 28%), with 13% feeling very negative. The negativity is particularly acute in developed markets including Western Europe (47% negative vs. 20% positive) and North America (48% negative vs. 26% positive). 

However, although private equity cites difficulties in raising new funds, the outlook for exiting investments is altogether brighter. Globally, nearly two thirds (63%) of practitioners expect to see exits increase. This rises to 79% of firms in the Middle East and North Africa and 69% in Western Europe expect increases.

Martin Goddard added: “With stretched holding periods for investments, generating quality exits is vital. IPO exit channels remain largely closed off, but the burgeoning markets for secondary buyouts and strategic trade buyers have helped fill the void. Faced with the dual pressures of needing to put investors’ money to work and needing to realise investments, the sector, particularly in more mature regions such as Western Europe and North America, is fuelling a secondary buyout market that is cited as the exit route for 45% and 35% of deals respectively.”

Please click here to download the full report.

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For further information please contact:
Damien Packer
International marketing operations manager
T +44 207 391 9567
E damien.packer@uk.gt.com

Notes to editors:

Grant Thornton is one of the world’s leading organisations of independently owned and managed accounting and consulting firms. These firms provide assurance, tax and specialist business advice to privately held businesses and public interest entities.

More than 2,500 partners provide clients with distinctive, high quality service in over 100 countries.

Methodology:

This snapshot of the global private equity industry was produced following qualitative and quantitative interviews with top executives around the world during autumn 2011. Participants came from across the private equity industry and answered questions on a range of issues including new investment activity, portfolio management, exiting and fundraising. This approach enabled detailed exploration of likely trends throughout the private equity cycle and identification of key pressure points.