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Private equity firms getting more involved in management of portfolios, research shows

Private equity firms are becoming increasingly active in the management of their underlying portfolio companies in order to counteract falling returns, according to research carried out by Ernst & Young in Europe.

‘We have found that a more active approach towards the businesses in which private equity funds have invested has boosted returns and helped to counteract the effect of lengthening investment cycles,' said Caroline Grounds, Ernst & Young's head of private equity.

‘Where in the past a fund would be looking to exit its investment within three or so years, it is now in for a long haul as the traditional exit routes are not available,' Grounds continued. ‘The original funding plan could prove too costly and restructuring would benefit both the company and the investors. Such action would help to reduce the number of write-offs, currently running at more than a quarter of all private equity divestments.'

Ernst & Young's research shows that the traditional ‘buy, hold, sell' private equity model has been replaced by a ‘buy, act, sell' approach. Private equity firms are increasingly looking towards restructuring options such as taking out cost, de-gearing, closing locations and integrating parts of the business. Firms are also concentrating on the need to accelerate growth and improve profits by opening new markets, product rationalisation and synergy capture.

‘The move towards public disclosure in private equity is putting private equity houses under additional pressure,' warned Garry Wilson, private equity restructuring partner at Ernst & Young. ‘As the ability to raise funds remains constrained, the house with strong performance will find it easier to raise funds and progress faster, but poor performers will be exposed. It is imperative then that all houses make a priority of maximising the value locked into individual portfolio companies now.'

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