This is the twelfth annual report on the performance of private equity-owned portfolio companies, compiled by EY. The report presents independently prepared information to inform the broader business, regulatory and public debate on the impact of private equity ownership.
Investment in M&A has been much more buoyant in the UK over the last two years than either business capital investment or foreign direct investment. This, together with the relatively large size of the UK’s financial sector compared with other developed countries, means that it is very important that we continue to work to understand how the structure and performance of our economy are impacted by different business approaches. In this context, the annual report prepared by EY on the performance of portfolio companies for the BVCA provides an important insight into how private equity (PE) impacts many aspects of performance at large UK businesses.
In aggregate, the portfolio companies under PE ownership have shown positive growth in employment, investment, productivity, revenue, profits and returns to investors, supporting the high financial leverage that is a feature of the PE business model. Compared with relevant public company and UK-wide private sector benchmarks, the performance of the portfolio companies on employment, investment, compensation and productivity growth is in line or ahead of the comparators, indicating some benefits of the PE ownership model. The most striking difference is in capital productivity with the portfolio companies significantly ahead of public companies in driving improvements in this area.
The analysis is based on a wide range of data using an approach developed over several years, hence we can be confident in the results while accepting variations in the make up of portfolio versus public companies means we should always be careful in drawing definitive conclusions. Given the number of companies in the dataset, the specific reasons behind movements in metrics cannot be inferred simply based on the data received as there may be other internal and external factors to consider.
The results presented in this report provide no evidence of any adverse macroeconomic impact from PE ownership of these large UK businesses. It also seems reasonable to conclude that there is little difference in many measures of performance between portfolio companies and their comparators in public companies — other than in investment performance where the PE-owned portfolio companies generate far greater returns to investors from a mix of additional leverage and strategic outperformance. The differences in the levels of activity in financial markets compared to capital investment and FDI are interesting, especially given the concerns over productivity amongst UK policy-makers, and it would be worth seeing if there are lessons that can be drawn from these trends.