Published: Jun 23, 2014
Andrew Craig, Partner
Over the past 6 years the trials and tribulations of the financial services sector have rarely been out of the headlines. Often the spotlight has fallen on the Private Equity (PE) industry and the perceived negative impact that PE ownership has on a business and the economy in general.
Whilst there are some high profile examples of poor stewardship and governance by some PE owners the reality is that there is little evidence to suggest that this is endemic across the PE industry in general. A recent study commissioned by Adveq identified a number of areas where PE has made a consistently positive contribution to the economy, businesses and investors. In my view the following are of particular note.
With unemployment rates of 1 in 4 in some European countries and government austerity programmes still being implemented it is pleasing to see that despite the challenging economic conditions, companies funded by PE grew their staff numbers by on average 26% (Based on a survey of 34 PE fund managers across Europe). The reason for this is that when pursuing organic growth PE backed businesses will usually need additional personnel to deliver their strategic plans and hence will increase rather than reduce the size of the workforce.
Environmental, Social and Governance (ESG)
Key issues like climate change, population growth and natural resources constraints are firmly in the public eye and hence having an active ESG policy has become a key issue for businesses both large and small. A PE investor adopts a highly active ownership model, which puts it in a position to positively influence all parts of a business including its approach to ESG issues. PE has also grasped ESG as an opportunity both to reduce the risk of investments for investors and to increase returns.
Access to Finance & Expertise
Whilst access to bank finance remains a challenge for small to medium size enterprises (SME) in particular, despite record low interest rates since 2009, this has afforded PE an increased opportunity to engage with the SME community to provide flexible and long term committed capital to help fund future growth.
A key feature of PE is its ability to work alongside management to help professionalise the business by attracting quality executives and investing in key functions such as IT, HR and business development. PE fund managers will also look to improve internal business processes like procurement, sales and production to help increase efficiency and ultimately deliver higher profits.
Investors in PE
After enjoying a bull run for much of the last decade, quoted equity markets are starting to return to their average historical risk/ return profile. This provides PE with the opportunity to attract capital from investors seeking attractive long term risk-adjusted returns as the investment gains from PE are in the main driven by the skill based investing of its managers. All of this has resulted in substantial risk-adjusted outperformance by PE over quoted equities over both five and 15 year timeframes.