European companies - more difficult to be persuaded to acquire other companies

• Volume of exits drops to 61 in 2012 from 85 in 2011 
• 80% of companies increased value under PE ownership

Private equity (PE) exit numbers dropped in Europe last year to 61 from 2011's total of 85 according to Myths and challenges  - How do private equity investors create value?, EY's annual study of European PE exits. The report cites a volatile economic climate and low transactions activity as the primary challenges for PE. 

However, despite the criticism sometimes leveled at the industry, in aggregate terms PE-owned businesses grew employment by 2% in 2012. Forty-four percent of the businesses studied made adds-on acquisitions, while only 10% made disposal. Eighty percent delivered gross returns to investors above leverage and market returns from 2005 to 2012.

Sachin Date, Europe, EY's Middle East, India and Africa Private Equity Leader says: "With Europe and many other regions showing little or no GDP growth over such a prolonged period, the PE portfolio has inevitably been affected. Profits growth in businesses exited in the boom times was running at over 15% a year; the figure for businesses exited in the last two years has fallen to 5% - demonstrating that driving growth in the portfolio has become very difficult indeed. Ultimately, the knock-on effects of this trend lead to some stress in the industry as investment returns decline, investors become selective, and some firms struggle to raise a new fund.”

Since the onset of the crisis, the PE industry has seen low levels of activity relative to the size of the portfolio. The decline in exits in 2012 was even more significant; there were only 61 exits in our 2012 sample, down from the 85 exits in 2011 and almost on par with 2010 levels. While the proportion of trade buyers increased, only 9 of the 24 exits that went to trade were bought by European companies; 10 were sold to US buyers and 5 to strategic buyers from Asia Pacific and the rest of the world. 

"At under 40% of exits to European trade buyers, this is the lowest percentage ever recorded in our study, a clear demonstration of the lack of confidence European corporates experienced in pursuing M&A strategies. On the flip side, the proportion of trade exits that went to US and buyers from the rest of the world increased in 2012. This is just one sign that international buyers are an important source of exits for PE, while European buyers continue to hold back,” says Bogdan Tenu, Senior Manager in The Transaction Advisory Services departement, EY Romania.

In contrast with 2010 and 2011- when sales to other PE houses accounted for nearly half of exits - secondary buyouts reduced in 2012 as a proportion of exits to just over 35%.

"As we move through 2013, it is unlikely that the market will be there to help with the challenges that the PE industry faces. The IPO window cannot be relied on and European corporate buyers remain uncertain. Generating successful exits will be the key to securing future funding from investors. However, the data shows that the PE model remains resilient despite the challenges it faces”, concludes Bogdan Tenu.  

About the report

The 2012 study of Myths and challenges  - How do private equity investors create value? provides insight into the performance and methods of PE, based on the analysis of the largest European businesses that PE has exited over the last eight years. The owners of these businesses were not all European-based themselves; this is not a study of the performance of European-based PE investors, but is rather an analysis of the impact of PE on European businesses.

To avoid performance bias, and to ensure a focus on the largest businesses owned by PE, exits were screened to capture only those that had an EV at entry of more that €150m. This criterion was also applied to our estimate of the current size of the PE portfolio. In total, we have identified 527 exits of businesses that met our criteria over the eight years from 2005 through 2012 - the "sample”.

We assessed business performance for the duration of PE ownership - i.e., from entry to exit - based on key performance measures, including change in EV, profit, employment and productivity. To better measure aggregate economic impact, we used weighted averages.

This independent study is built with public data across the whole sample and detailed, confidential interviews with former PE owners of these businesses. Overall, we have performance data for up to 383 businesses. 

About EY Romania

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