“Financial investors make companies better”

PwC’s “Private Equity Exit Report” shows that financial investors are holding their investments in Germany companies significantly longer than in the 2000s. Steven Roberts, Private Equity Leader for PwC Germany, explains why that is.

For its latest private equity study, PwC has analysed financial investors’ exits from German companies between 2004 and 2017. What are the main findings?

Steve Roberts: Today, financial investors are selling off their investments in German companies far later than just ten years ago. Between 2004 and 2009, private equity firms held onto local companies for just 3.7 years on average. Since then, the average holding period has risen to 5.3 years. Should this trend persist, financial investors will hold their stakes in portfolio companies for up to seven years on average by 2019.

What is the reason for that?

Roberts: Many private equity firms have changed their strategy fundamentally since the financial crisis. In the 2000s, the main focus was on financial optimisation through the leverage effect, for example. By contrast, most private equity managers now try to improve acquired companies in the long term. A survey we conducted last year underpins this impression. When asked what methods they used to generate the desired returns, nine out of ten managers stated “operational improvements”. In addition, “buy and build” strategies are also growing more and more popular. The longer holding periods, however, are not always of a voluntary nature. With valuations and acquisition prices of targets having increased in recent years, the time financial investors need in order to sell the portfolio company and generate the required return has also increased.

Is the trend of extended holding periods in Germany still intact? Companies sold in 2014 were held for 5.8 years on average. However, holding periods have decreased to 4.9 and 5.5 years respectively in the past two years.

Roberts: That is correct. However, this countertrend is probably a temporary phenomenon, since the decrease in the average holding period is primarily an indirect result of the low interest rate. The flood of capital temporarily pushed some private equity funds into infrastructure deals. Many of these assets were then sold rapidly. Furthermore, some investment companies used the real estate boom to their advantage to generate short-term profits in this segment as well. In the traditional buyout business, by contrast, fast exits remain an exception.

The PwC study also suggests that the number of exits has been growing for years and that more and more companies in particular have been ending up in the hands of strategic investors. What does this mean?

Roberts: Indeed, the numbers are impressive. Since 2004, 53% of all portfolio companies were acquired by strategic investors. In 2015, the share stood at 65%. From my point of view, this is clear evidence against the still widespread accusation that financial investors exploit their portfolio companies. Instead, private equity funds are today considered active shareholders that improve their companies operationally. That is also the reason why strategic investors are usually happy to acquire such companies.