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Why Private Equity
Ernst & Young says private equity firms are exceptional executors of business growth, with more than 60% of their businesses exceeding their initial targets. The 100 largest private equity deals surveyed across western Europe in 2005 increased business value by 26% a year, compared with the average 12% achieved by listed companies. Management is more aligned with its private equity partners, sharing any upside or downside. Private equity groups apply more efficient capitalization structures, using an appropriate mix of debt and equity. This study found the appreciation did not come from cost cutting or financial engineering. In 85% of the investments, the value creation came from new strategies to drive growth, refocusing investment, making acquisitions and making a few key changes happen fast. Private Equity delivers better products, generates sustainable employment and ultimately results in companies that generate higher profits. According to a recent study undertaken by the European Commission, the private equity industry can make an important contribution to the re-generation of an economy by nurturing new enterprises and re-energizing existing companies. Furthermore, private equity can lay the seeds for sustained growth and job creation and assists in the drive to be increasingly globally competitive. Private equity financing also improves management and corporate governance in companies by setting a level of discipline.
Graph 1 shows sources of TSR (Total Shareholder Return) of one large private equity firm. Source: Boston Consulting Group Graph 1
Source of Total Shareholder Return
-5% 37% 50%
The graph below shows the comparison of Private Equity Growth indicators within the economy and the stock market Source: McKinsey and Co.
Overall Economy
26%
Private Equity Companies
% Annual Increase
12% 7.40% 3.90% 0.70% 5.40%
18%
Growth Valuation Multiple
Margin Improvement Net Debt and Leverage
Stock Value Growth UK
Revenue Growth Germany
Employment Growth Europe
Table 1 below shows how Blackstone Private Equity Group made a Turnaround at “Celanese Company”, one of the world’s leading chemical companies in just three years of time, between 2003 when Blackstone bought the company and 2006 when Blackstone re-listed it on the German stock exchange.
Table 1: Celanese Performance between 2003 and 2006
Item (USD m) Revenues Revenue Growth Rate Profitability R & D Expenditure Expenditure on Plant and Equipment Employment Productivity Per Employee Market Value 2003 $4,500 5% $675 $78 $210 9,400 $48 $3,300 2006 $6,700 14% $1,218 $91 $250 9,400 $71 $6,600 48% 100% % Change 49% 100% 80% 17% 19%
Zia Ahmed
Why Private Equity
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