UK Private Equity (PE) firms entered the pandemic in a strong position. Pre-COVID-19, portfolio companies under PE ownership delivered positive growth across employment, investment, productivity, revenue, profits and returns to investors, while also supporting PE’s characteristic high financial leverage, according to the 2019 annual report on the performance of portfolio companies by EY.

In 2019, the benefits of the PE ownership model were further shown by its comparative performance to relevant public company and UK-wide private sector benchmarks. PE portfolio companies were shown to be ahead or line with their peers in terms of employment, investment and productivity growth.

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 or four times greater than the public stock market.

Findings of the report

• Portfolio companies have been owned for an average of 3.4 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 had grown (removing the effects of bolt-on acquisitions and partial disposals) has grown by 1.5% per annum. Annual employment growth of the portfolio companies was above the private sector benchmark of 1.2% (organic) and the public company benchmark of 2.5% growth (reported).
• Average annual employee compensation growth under PE ownership was above the UK private sector benchmark, at 3.2% versus 3.0%.
• PE investors, in aggregate, had increased operating capital in portfolio companies by 2.0% per annum, which was slightly below the public company benchmark of 2.4% per annum.
• Labour and capital productivity grew under PE ownership, by 1.5%–3.3% and 12.2% per annum respectively. Capital productivity growth in the portfolio companies exceeds public company benchmarks, at 12.2% versus 1.1% growth per annum.
• Since acquisition, portfolio companies grew reported revenue at 7.3% per annum and EBITDA at 5.3% per annum; organic revenue and EBITDA growth was 5.1% and 4.0% per annum respectively. This was significantly above the public company revenue and EBITDA benchmarks at 4.1% and 3.9% per annum respectively.
• The equity return from Portfolio Company exits is more than three times the public company benchmark.

Paddy Moser, UK&I Private Equity Transactions Leader at EY, said: “Our analysis shows the UK Private Equity market was in a strong position ahead of the pandemic, contributing positively to large UK corporates across a number of aspects. 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. The priority for 2021 will be a relentless focus on operational and strategic improvements to portfolios.”

About the report

This is the thirteenth 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 thirteen 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 91% of the total population of portfolio companies, including the largest UK acquisitions. This year, compliance for the current portfolio companies was 53 out of 61, or 87%.

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 includes up until financial year-end in 2019. While the results for 2019 confirm that the trends in PE-owned company performance continued throughout the year, 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 how ownership impacts performance in the 2020 analysis.

READ THE REPORT

Notes to editors

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