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EquityFC Blog
Why good financial management matters to PE | 27 July 2010
Great article in the FT this Sunday by Tony Jackson on some analysis of private equity returns. This is the good bit: "One study he cites unpicked the returns on 110 completed deals in the UK and Europe between 1995 and 2005. The average internal rate of return was 39 per cent, of which debt accounted for 22 per cent and a rising stock market 9 per cent. That left just 8 per cent as the contribution of the private equity managers."
It goes on: "Considering that Mr Morris puts the average annual fees in private equity at 8 per cent – some put it higher – this is thought-provoking. It means, in effect, that the pension funds which provide the bulk of the money would have been as well off investing in the market directly and borrowing the leverage from the bank." At a time when fundraisings are under pressure and the PE model is in danger of over-regulation, firms are going to be looking hard at deals where there is a strong "management" component and where growth contributes a higher level of the overall return. (Of course, this kind of analysis usually focuses in on the big LBOs - in the mid-market, leverage has never played such a major role...) Growth and development means having financial management in situ that goes beyond box-ticking, solid reporting and cost control. Great news if you're a forward thinking, value-adding FC or FD, then.