Private Equity Buyouts Are Real Deal For Company Growth
As an increasing number of South African-listed companies are snapped up by private equity investors, a global study has shown that businesses bought by private equity consortiums grow significantly faster than listed companies.
A report by professional services firm Ernst & Young says an analysis of the 100 largest exits by private equity investors across western Europe in 2005 showed that these businesses, on average, doubled in value in an average hold period of three-and-a-half years.
This was a substantially faster rate of value growth than listed companies achieved over the same period. Ernst & Young says private equity firms are exceptional executors of business growth, with more than 60% of their businesses exceeding their initial targets.
Private equity businesses surveyed increased business value 26% a year, compared with the average 12% achieved by listed groups. Although no research is available for exits by private equity players in SA, Brait executive director John Gnodde says private equity-owned businesses probably grow two to three times over a three-to-five- year period. This translates into a rate of return of more than 30% that private equity groups such as Brait typically target.
Ethos Private Equity CEO AndrÃ© Roux says the support South African private equity managers have received from institutional fund managers is a strong indication that they have been able to earn returns in excess of what the public market has been able to produce.
In October, Ethos closed its Fund V at R5,5bn, the largest private equity fund in Africa to date. Brait closed its Brait IV Fund in December and will announce the results later this month. It initially aimed to raise $550m for this fund, but is widely expected to have raised more than this.
“The work we have done on our portfolio is interesting,” says Roux. “Apart from generating a significant premium to the public markets, what we’ve found is that comparing our portfolio performance to national statistics, we’ve been able to increase revenues in our portfolio companies relative to the national average by 1,3 times and increased exports by 1,5 times more.”
He says this growth has not come at the expense of jobs as employment in companies managed by Ethos and the consortia it is part of has increased by more than the national average.
“What we’ve found is that most credible private equity houses go into investments with the view to build the business and not to run them on a shoe string,” Roux says.
Private equity houses have to generate the returns that will attract new money into their funds and they do this by improving the businesses they buy, he says. “Our feeling is that private equity is a force for economic good because it helps build better businesses,” Roux says. “It delivers better products, generates sustainable employment and ultimately results in companies that generate higher profits. That is why private equity businesses on a sustainable basis have been able to raise bigger funds than previously.”
In 2000, Ethos led a consortium that bought Waco International for R2,4bn. Ethos exited the investment early last year, when it was sold to private equity groups CCMP Capital Asia, JPMorgan Partners Global Fund and management for R5,4bn.
“That is itself is a demonstration of value creation over that particular period,” says Roux. “There are many examples like that.”