Private equity-owned companies are growing faster
Gain.pro’s analysis is based on data from more than 15,000 companies that are either independently owned or private equity-owned. Some conclusions are:
• PE-owned assets outperform privately or family-owned assets. On average, most PE-backed assets grow their revenue three to five percent faster per year, with EBITDA margins also higher by three to five percent. Both CAPEX and FTE growth rates are also higher among PE-backed companies.
• Companies owned by private investors are doing more mergers and acquisitions, boosting overall growth rates and margins. 48 percent of PE-backed companies conduct add-on acquisitions, while only 27 percent of independent companies do so. M&A increases the overall growth rate for the acquirers by two to three times.
• Private equity firms acquire the best independent companies in their class. Companies bought by PE investors grow at least twice as fast as the broader independently managed asset pool. These companies also have higher margins and higher growth rates compared to their portfolio holdings. Waterland, Carlyle, H.I.G. Capital and Oaktree Capital are the top buyers of independent companies, according to Gain.pro analysis.
What lies beneath the growth engine of private equity?
There are several reasons why PE firms are growing faster, according to the report. First, these companies tend to have a more aggressive growth agenda and continue to invest throughout the cycle. Compared to independently held assets, they are more focused on the TMT and Services sectors, which are faster growing and more resilient.
PE-backed companies are also more likely to expand internationally and often inject capital into companies, allowing them to expand, innovate and create new jobs. They are also more agile in their actions. For example, following the COVID-19 crisis, PE firms accelerated their hiring as the economy recovered, quickly adapting to the changing landscape.
Finally, PE-backed companies invest more in their businesses. CAPEX levels are higher on average as PE firms invest in new technologies and upgrades to improve efficiencies and chart a path for future growth.
Buy & Build is a recipe for rapid growth
PE firm companies make more acquisitions than privately held companies and an effective M&A strategy is a key principle in creating value. Selecting the right target at the right price can generate a lot of value through revenue growth, cost synergies and accelerating multiple arbitrage.
Over the past five years, 48 percent of PE-backed companies made add-on acquisitions, while only 27 percent of independent companies did so. Overall, 21 percent of PE-backed companies have acquired three or more companies (compared to just seven percent of privately held companies).
Pursuing value-enhancing add-ons is one of the key tenets of many PE firms’ investment strategy. With the support of their investor, portfolio companies can consolidate resources, streamline operations and leverage shared expertise – resulting in higher margins and growth.
