Landmark bankruptcies and restructurings such as those involving Four Seasons Healthcare (UK), Windreich (Germany) and Alteo (France) have created a challenging narrative in Europe around PE-ownership. In response, politicians like Jeremy Corbyn in the UK have spoken out against further growth of the sector, fearing job losses and financial instability.
Private market intelligence provider Gain.pro, recently conducted a landmark study proving these isolated cases making headlines are far from representative. Analyzing over 15,400 PE-backed and family or privately-owned assets in Europe side to side, three findings stand out:
- Revenue growth is 2x faster for PE-owned businesses: On average, majority PE-backed companies grow their revenue ~3-5% faster per year, with EBITDA margins being 3-5% higher as well.
- PE-backed companies provide more jobs: They create employment at a faster rate, which is exemplified by post-COVID year 2022 when PE-held companies grew employment 10% versus a mere 4% for their family-held peers.
- They invest significantly more into their businesses: Long-term investment (capital expenditures) averages 3.2% of sales for PE-held companies, significantly higher than the 2.6% invested by independently held businesses.
These surprising findings make a strong case for a sector that is often associated with cost-cutting and austerity. An important nuance, however, is that further data shows that the main driver of outperformance is ‘asset selection’ rather than necessarily better steering. In other words, private equity often acquires those businesses that already do well. However, this data does unequivocally provide that an ownership change into PE-hands on average has no adverse impact. In fact, immediately following the acquisition businesses typically increase their investment level (capex) and rise employment (FTEs). They do so at the expense of short term margins and profit.
Commenting on the findings of the report, Benoit Ficheur, Senior Partner at pan-European private equity firm Astorg said: “Across our portfolio, R&D and CAPEX is a strategic commitment to sustained growth and future-proofing the business. It’s key to staying competitive in a constantly evolving world. Besides, we can indeed see that R&D increases as a percentage of revenues in all our portfolio companies following our investments.”
The report data is derived from the largest-of-its-kind study of European private companies. The period of observation is the 6 years from 2017-2022. Proprietary data-gathering methods make it possible to derive much more granular insights into the European pool of companies than previously possible, putting a new perspective on often-held common beliefs.
