Private Equity Gets the Organic Growth Bug (Too)
I’ve previously talked about Kraft, P&G, Wells Fargo, Pernod and others whose CEOs have jumped onto the organic growth bandwagon. Add to the list private equity companies. Yes, those soulless, blood sucking private equity types who supposedly want to fire everyone in the name of the almighty dollar (or Euro or whatever) actually do care about company performance, and many are actually quite good at driving it according to a new study. And the centerpiece to their work is good old organic growth.
The September 2008 issue of CFO Magazine has an article entitled, “Let Us Now Praise Private Equity” by Kate O’Sullivan which discusses a new study by Ernst & Young. Ms. O’Sullivan writes:
“Often viewed as hard-hearted financial engineers who pile up profits by slashing expenses, P-E kingpins are criticized for their lack of transparency, their much-debated tax status, and, of course, their lavish lifestyles. But a new report offers support for the same case that P-E bosses often make for themselves — namely, that they are not only shrewd investors but also talented managers.”
John O’Neill, Americas director of private equity at E&Y, goes onto comment that “We found that probably only a third of that growth is from cost-cutting. More than 50 percent is organic growth, and the rest is acquisition-related.”
Let’s do the math on that 50+% from organic growth, 33% from cost cutting and less than 12% from acquisitions. It seems from the numbers that private equity managers know what the heck they are doing and understand that driving efficient organic growth is key to driving value. And the numbers prove out their reliance on organic growth is well-placed.
“Private-equity-backed businesses outperform public companies in productivity gains, in employment growth, and in business expansion, measured both in terms of enterprise value — the company’s market value plus net debt — and earnings before interest, taxes, depreciation, and amortization” (quoted from the article)
It seems some of the savviest buyers of companies know that organic growth is the way to go. When will others see the light as well?
