The PE Market
Steady growth
During the last two decades, the global private equity market has experienced steady growth.
It has evolved from a cottage industry dominated by entrepreneurial individuals into a highly differentiated asset class with its own global institutions.
In terms of value, the industry’s recent growth has been primarily driven by a leading group of large firms whose core business is private equity buyouts.
At this level, a handful of firms are emerging that are uniquely equipped to structure complex cross-border deals and buy businesses worth billions of euros. In the last three years, this growth has accelerated dramatically.
In 2006 alone, around 3,000 buyout deals were completed for a combined value of more than half a trillion euros.
Institutionalisation
The largest firms have acquired this status because they have provided consistently superior returns.
They are well positioned to maintain this advantage because they possess a unique set of skills and personnel within highly developed institutional frameworks.
The prize for those few that are able to crack the challenge of becoming global is a big one; capital will continue to migrate from traditional asset classes to those alternative assets that are best able to provide long-term outperformance.
At present, around 3% of global capital under management is invested in alternative assets. As this figure rises, institutional investors will be forced by their own internal economics to commit larger amounts of capital to fewer firms.
The globalisation of the economy as a whole also creates the need for a global equity capability. As private equity deals get larger, they are increasingly taking on a global dimension.
It stands to reason that the investors best able to understand these businesses, perform local due diligence, find and recruit local management and fully grasp the sectors in which they operate, will themselves share knowledge gained across different geographies.
Investors
As it moves into the mainstream, private equity has become an established part of the investment mix for many of the world’s largest investors, including pension funds, insurance companies, banks and university endowments.
These institutions are committing an increasing proportion of their capital to private equity because it has out-performed the more established investment choices available.
Apax Funds have consistently out-performed stock market indicators and the best benchmarks in the private equity industry. The ultimate beneficiaries of this continued out-performance are the millions of individuals who commit to the pension funds which invest in Apax Funds.
Economic impact
As well as offering institutional investors superior returns, available studies show that private equity plays an important role in economic growth and job creation.
Apax Partners recently engaged an independent consultancy to assess the drivers of value creation and the economic contribution of the Apax Funds’ Portfolio to the wider economy.
Some 84% of the participants to the study consider Apax Partners’ investment to have helped increase employment levels. Overall, of the companies surveyed, employment growth averaged 10% per year.
The three areas in which Apax Partners was deemed to have helped most businesses were with strategic direction, where 94% of respondents stated that Apax Partners had provided beneficial support, management recruitment (58%) and business contacts (58%). Other industry surveys point to a similar picture.
Research conducted for the British Venture Capital Association (BVCA) found that over the five years to 2006/07, the number of people employed worldwide by UK private equity-backed companies increased by an average of 8% p.a.
Of this, 84% of responding companies said their growth was organic, rather than through acquisition. It is estimated that companies that have received private equity funding account for the employment of around three million people in the UK, equivalent to 21% of UK private sector employees.
According the BVCA research, these companies performed well against other measures. Over the five years to 2006/07, sales rose by 8%p.a., exports grew by 10%, corporate investment rose by 11% and R&D by 14%.
For the financial year 2006/07 it was estimated that private equity-backed companies generated total sales of £310bn, exports of £60bn and contributed nearly £35bn in taxes.
The private equity business also has a wider multiplier effect on the financial services industry. Recent BVCA figures show that professional services firms generated an estimated £5.4bn in revenue through the provision of services to the private equity community, representing around 12% of the total annual turnover of the UK financial services industry.