CFO Magazine: How Private Equity is Driving Value

A recent article in CFO Magazine reports on a new EY study showing that “strategic and operational improvements” account for more than half of private equity returns. A strong focus on operations has helped private equity to deliver superior, long-run returns to investors such as pension funds, charitable foundations and university endowments.

Private equity-backed companies “have outperformed their publicly held peers with the returns they generated for investors,” says the article.

“PE continues to outperform public markets,” according to EY. “For exits in the 2006–12 period, PE has outperformed by a factor of 5.4, with PE’s strategic and operational improvement initiatives driving a large proportion of the overall return.”

Roughly half of the return realized when private equity firms exit portfolio companies is from strategic and operational improvements, says EY. The study attributes private equity’s significant returns for investors to a strategic shift by the industry to focus on driving earnings growth. In nearly all partnerships studied as part of the report, private equity sponsors had developed a 100-day plan focused on enhancing revenue or generating cash.

“It’s more of an operating model: getting the right management team in place, driving business expansion into different geographies, adding products and expanding through acquisition,” said Jeffrey Bunder, global private equity leader at EY in the piece.

View our white board video below to learn about who benefits from the significant returns generated by private equity.