EY Report on the Performance of Portfolio Companies

This report presents aggregated data collected by EY from PE firms and their companies. It tracks the performance of companies under PE ownership against listed company and other benchmarks.

This is the 17th annual report on the performance of portfolio companies, a group of large, private equity (PE) owned UK businesses that met defined criteria at the time of acquisition. Its publication is one of the steps adopted by the private equity industry following the publication of guidelines by Sir David Walker to improve transparency and disclosure, under the oversight of the Private Equity Reporting Group (PERG).

This report addresses many questions that various stakeholders may have on the impact of private equity ownership on large UK businesses, by presenting facts and benchmarks to provide answers. The report is designed to be read stand alone, summarising the accumulated data over the past 16 years of reporting; it also contains comparisons with last year’s results and, for some measures, shows time series trends.

Answers to key questions for stakeholders addressed in this report:

• Do portfolio companies create jobs?
• How is employee compensation affected by PE ownership, e.g., pay and pension benefits?
• Do portfolio companies increase or decrease investment in capital expenditure, R&D and bolt-on acquisitions or partial disposals?
• What are the levels of financial leverage in the portfolio companies, and how do they change over time?
• How do labour and capital productivity change under PE ownership? Do companies grow during PE ownership?
• What is the level of gender diversity in the portfolio companies?
• How do PE investors generate returns from their investments in the portfolio companies? How much is attributable to financial engineering, public stock market movement and strategic and operational improvement?

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Published 18 December 2024

What drives deal returns?

The value of a business will vary over time depending on the business prospects, the sector outlook and the macro economic environment of the time – all of which influence the expected risk of investing in a business and possible return which may be achieved.

When looking at the return on investment achieved, this can be broken down into three components:

1. Market movements

Changes in expectations for the business arising from market conditions and the economic outlook will influence the value at exit vs. the value at initial investment date.

2. Additional leverage

The vast majority of mature businesses have some element of debt as part of their capital structure, as this can be a cost-effective way to finance their operations.

A standard part of the private equity tool kit is to use bank or other debt to fund a portion of the acquisition value. As the cost of debt (i.e. the interest paid) is intended to be less than the return generated by the investment overall, additional leverage can boost the returns to equity.

3. Strategic and operational improvement

PE firms work with management teams to make significant operational and strategic improvements in the businesses they invest in – whether that be developing new products, entering new markets or funding a new factory.

There is no definitive approach to estimating the different components of deal returns, however this approach reflects key contributions to value creation and has been presented consistently in this report over several years.

How do we quantify the different elements of return?

1. Market movements

We look at the Total Shareholder Return which would have been generated by an investment in a comparable public market index (e.g. the FTSE All Share Index). The Total Shareholder Return captures both increases in the value of the stock market plus dividends paid.

2. Additional leverage

To assess the impact of additional leverage, the equity return is re-estimated assuming a ‘normalized’ capital structure, i.e., using the same proportion of debt as for comparable public companies. We also assume that any dividends are instead used to pay down debt.

3. Strategic and operational improvement

It is not possible to capture the economic impact of this directly, but we can estimate this indirectly as being the total equity return less the proportion of the return attributed to 1) and 2).

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Published 18 December 2024