Editorial 2016: Private Equity — Challenges and Strategies for the Future

Private equity, the off-market equity for established growth companies, has established itself in recent years as an important source of financing for companies with innovative technologies and business models. One could certainly speak of the private equity industry coming of age. But what is meant by this? Not only has the appreciation and acceptance of private equity as an economically significant financing instrument matured, but developments within the private equity industry also point in this direction. While in the past the focus was on financial creativity or even the ability to identify undervalued companies, today more than ever private equity houses need to rethink their strategies to achieve their goals. The overriding goal of putting a portfolio company on a competitive growth course and thus achieving an above-average return for the investors in the respective fund remains, but the ways and requirements for achieving the goal present the private equity industry with new challenges.

A closer look at the growth trajectory of portfolio companies reveals the extent to which the overall value creation within the portfolio companies is driven by various value drivers. However, a recent empirical and global study by the Technical University of Munich underscores that (contrary to the widespread assumption to the contrary) the improvement in operational value creation was the most important lever in this regard, relatively speaking. And their importance has increased even more in recent times (especially after the recent economic and financial crisis from 2007 onwards) in figures this means that almost forty percent of value added is attributable to operational improvements. By contrast, the contribution made by optimizing the capital structure in the form of increased use of debt capital, referred to in technical jargon as the leverage effect, and by higher valuation multiples on sale has comparatively diminished in its effect over time. At the same time, however, it should also be noted that over the identical period, total value added and thus also the returns achieved have declined. The results are robust and consistent even when explicitly considered across different industries or regions, including Europe.