How private equity creates value

An active ownership model driving returns well in excess of public markets

Private equity-backed companies are all around us, touching our everyday lives from food and consumer goods, to healthcare services, software, travel and leisure. Most sectors in almost every developed economy have companies owned and funded through private equity investment.

With many of the world’s largest and most sophisticated institutional investors and pension funds increasingly allocating capital to private equity, the asset class has gone from alternative to mainstream, with an estimated $4.0 trillion of assets globally. Investors are attracted by both the higher returns on offer and the wider opportunity set available, as the number of companies in private markets far outweighs those on public markets.

How does private equity create value?

Private equity is an active ownership model, with managers typically acquiring controlling stakes in companies and creating value by growing and improving them. Key drivers of performance include:

• An active and hands-on approach
• A long term investment horizon
• A focused stakeholder group with strong alignment of interests
• An extensive due diligence process
• Strong governance and responsible investing
• Exit planning

What does an active and hands-on approach involve?

When you invest in private equity, you are investing in the skills and expertise of the manager to identify and work with companies to unlock growth. Managers are actively involved in the running of the businesses they invest in, directing them through board representation and governance rights as well as, typically, through majority shareholdings.

Strategic change

Strategic repositioning can include expansion into new markets or business lines, rolling out sites or growing companies through acquisition. Private equity managers use their commercial acumen to direct management to prioritise strategies that maximise long-term value.

Operational improvement

Most leading private equity managers have in-house specialist teams whose sole focus is to work with company management teams to maximise efficiencies and drive sustainable growth. Examples include improving procurement, sales force effectiveness and optimising operating models. Close lines of communication mean that any issues can be identified early and action taken to preserve value.

Financial discipline

Private equity managers bring significant financial and capital markets expertise, ensuring companies have access to competitive financing solutions and the right capital structure to withstand economic uncertainty. They also encourage discipline with respect to capital expenditure decisions and working capital management.