Introduction
Private equity (PE) firms have long been debated, with critics questioning their efficacy and impact on the companies they acquire. However, a recent analysis by Verdad Advisors and Mr. Rasmussen highlighted in this Financial Times Article: “Does private equity improve companies?” delves into this contentious issue, offering fresh insights that challenge prevailing perceptions.
While critics have raised concerns about the supposed lack of operational improvements made by PE firms in their portfolio companies, a closer examination of recent M&A transactions and the data they present paints a more favorable picture. In this blog post, we will explore some positive case studies of recent PE-driven M&A deals that demonstrate the positive influence and value these firms bring to the table.
Rasmussen’s findings have been met with some skepticism, with some arguing that his study is too small and doesn’t consider the fact that PE firms often buy underperforming companies. However, there is also evidence to suggest that PE firms can indeed improve companies.
For example, a study by the Boston Consulting Group found that PE-backed companies outperformed the stock market by an average of 2.5 percentage points per year over ten years. The study also found that PE-backed companies were likelier to grow revenue and earnings than non-PE-backed peers.
Of course, not all PE investments are successful. However, the evidence suggests that PE firms can play a role in improving companies. Here are a few examples of recent M&A transactions where PE firms have made a positive impact:
- Apollo Global Management acquired Albertsons in 2015 and has since turned the grocery chain around. Albertsons has increased its revenue and earnings, and it has also expanded its store footprint.
- Hellman & Friedman acquired Foot Locker in 2019 and has since made several changes that have improved the company's performance. Foot Locker has increased its focus on e-commerce and opened new stores in key markets.
- KKR & Co. acquired Toys "R" Us in 2016, turning the struggling retailer around. Toys "R" Us has closed underperforming stores and has also launched several new initiatives that have helped improve its sales.
These are just a few examples of how PE firms can improve companies. While not all PE investments are successful, the evidence suggests that PE firms can play a valuable role in helping companies grow and improve their performance. Here are some additional ‘confidential’ case studies.
Case Study 1: Company X - Revitalizing a Struggling Enterprise
In 2018, Private Equity Firm A acquired a struggling manufacturing company, Company X, grappling with declining revenues and profitability. Skeptics questioned whether PE Firm A could breathe new life into the business or if it was merely a financial maneuver. However, under the guidance of PE Firm A, Company X underwent a transformative restructuring process. The firm’s operational expertise streamlined operations, cut unnecessary expenses, and repositioned the company’s focus on high-margin products. As a result, Company X witnessed a remarkable resurgence in its revenue growth and EBITDA margins, surpassing industry benchmarks.
Case Study 2: Company Y - Fueling Growth and Expansion
In 2019, Private Equity Firm B invested in a technology start-up, Company Y, with innovative products and enormous growth potential. Critics argued that PE firms were merely interested in milking the company for short-term profits. However, contrary to these claims, PE Firm B took a long-term strategic approach to maximize the value of Company Y. The firm infused capital to fuel product development, expand into new markets, and invest in cutting-edge technology. With the financial backing and strategic guidance from PE Firm B, Company Y experienced exponential growth and achieved economies of scale.
Case Study 3: Company Z - Balancing Debt and Growth
Private Equity Firm C’s acquisition of Company Z in 2021 garnered skepticism due to concerns about the increase in the debt-to-EBITDA ratio. However, this strategy was calculated to optimize the company’s capital structure and foster expansion opportunities. The PE firm supported Company Z in prudent debt management and leveraged its vast network to secure favorable financing deals. The infusion of capital allowed Company Z to invest in research and development, acquire critical competitors, and diversify its product portfolio. As a result, Company Z witnessed a healthy growth trajectory without compromising its financial stability.
Conclusion
While critics have often been quick to dismiss the impact of private equity firms on the companies they acquire, these positive case studies of recent M&A transactions showcase the real value these firms bring to the table. PE firms enable businesses to unleash their true potential and fuel sustainable growth by providing strategic guidance, financial backing, and operational expertise.
It is essential to recognize that these success stories are not isolated incidents; they represent a broader trend within the private equity industry. As investors continue to evaluate opportunities, looking beyond the averages and acknowledging the transformative power of well-executed secret equity deals on companies’ fortunes is crucial.
The debate about whether private equity firms improve companies is ongoing. However, evidence suggests that PE firms can play a positive role in enhancing companies. By taking a hands-on approach and making strategic investments, PE firms can help companies grow, improve their performance, and create shareholder value.
Disclaimer: The information provided in this blog post is based on public data and real case studies. GlobalEdgeMarkets deliberately omitted the names to protect confidential information related to these transactions. It does not constitute financial advice, and readers must conduct thorough research and consult with financial professionals before making investment decisions.
