UK Private Equity (PE) firms experienced a wide range of trading results in 2020 driven by the impacts of the global Covid-19 pandemic, with technology and healthcare performing particularly well, whilst consumer-focused businesses struggled, according to a report by EY.
Employee driven metrics relating to job creation and compensation have been closer to the growth rates observed in previous years of the study, potentially reflecting government support to labour markets during the pandemic.
The annual report, compiled in partnership with the BVCA, revealed that portfolio companies achieved long-term growth across investment, productivity, revenue, profits and returns to investors, as well as supporting PE’s characteristic high financial leverage.
According to the report, PE owners invested more in bolt-on acquisitions than they realised in partial disposals. Additionally, the gross financial returns from equity investments in portfolio companies were three times greater than the public stock market.
- The 2020 report discloses a wide range of trading performances, with revenue and EBITDA dispersion significantly higher than previous years. This was likely driven by the current (sectoral) composition of the portfolio of PE owned companies, and the impact of the pandemic.
- Current portfolio companies have been owned for an average of 4.1 years which is below the average timeframe of PE investment in the portfolio companies of 5.9 years (from initial acquisition to exit).
- Underlying organic employment declined by -0.8% per annum in 2020 (compared with growth in most other years of the study). Annual employment growth of portfolio companies was below the private sector benchmark of 0.5% and the public company benchmark of 1.5% growth.
- PE investors, in aggregate, had increased operating capital in portfolio companies by 2.6% per annum since acquisition, which was slightly below the public company benchmark of 2.9% per annum.
- Labour and capital productivity grew under PE ownership, by 1.3%–2.4% and 10.7% per annum respectively. Capital productivity growth in the portfolio companies exceeds public company benchmarks, at 10.7% versus 0.4% growth per annum.
- Since acquisition, portfolio companies reported revenue growth of 4.9% per annum and EBITDA at 4.1% per annum; organic revenue and EBITDA growth was 1.9% and 2.3% per annum respectively. This was significantly above the public company revenue and EBITDA benchmarks at 1.3% and -2.3% per annum respectively.
- The equity return from Portfolio Company exits was more than three times the public company benchmark.
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Paddy Moser, UK&I Private Equity Transactions Leader at EY, said: “Our analysis shows the UK Private Equity market continues to contribute positively in a number of aspects, however unsurprisingly, there has been a much wider range of trading performance (revenue and EBITDA) this year compared with previous years. As we look towards an economic recovery and business navigates the post Brexit landscape, Private Equity will be a key sector driving growth. Mergers and acquisitions will offer opportunities as firms respond to the post- pandemic economy by restructuring, refinancing and reshaping.”
About the report
This is the fourteenth annual report on the performance of portfolio companies, a group of large, private equity- 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 to improve transparency and disclosure, under the oversight of the Private Equity Reporting Group.
The report is based on information provided on the portfolio companies by the private equity firms that own them. With a large number of portfolio companies, and now fourteen years of information, this report provides a comprehensive and detailed insight into the effect of private equity ownership on large, UK businesses. As the study notes, it is possible to make a wide range of claims about the effect of private equity ownership if the fact-base is limited to any one or two examples. This report aggregates data across a defined set of businesses, which gives a robust fact-base.
The aggregated data in the report covers 93% of the total population of portfolio companies, including the largest UK acquisitions. This year, compliance for the current portfolio companies was 57 out of 64, or 89%.
The two main measures used in this report cover:
- The entire period of PE ownership of all the portfolio companies i.e. from initial acquisition to latest date or exit
- The latest year on the prior-year comparison of the current portfolio companies.
The data presented in the report reflects results of companies with part of the financial year falling in 2020 (i.e., current portfolio companies have a financial year ending between June 2020 and 30 June 2021). The results for 2020 confirm that the economic shock from COVID-19 over the last 12 months has impacted sectors in very different ways and we should be able to gain new insights into the structural vs cyclical nature of these trends in 2021 and beyond.
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