Private Equity Targets and Post Investment Performance: A Study of the Corporate Sector in the North and Regions
This report contributes to policy efforts to transform Northern growth, rebalance the UK economy and establish the North as a global powerhouse. We utilise a unique corporate level database covering the period 1998 present to analyse the characteristics of the corporate sector in the North of England with a view to identifying the size and nature of the potential target market for growth finance through mid market private equity (PE) investments. For this purpose we focus on companies within the size band of PS5 PS15m in assets and/or turnovers in the PS5m plus range across all industry sectors. For purposes of this report, the North is defined as comprising the North East, North West, Yorkshire and Humberside, East and West Midlands government standard regions. The North consistently has around a third (32.5% of the total number of active companies throughout the whole period 1998 2013. Recent analysis by the Centre for Management Buyout Research (Imperial College Business School) shows an increase in the number of private equity backed buyout deals in the period since 2012 with the Northern regions showing most activity outside London and the South East. We estimate that the Northern regions have 44% of the stock of PE invested firms in 2013. In 2015 81 deals worth PS5.5bn were completed in the Northern regions representing 38.0% by number of deals and 27.1% by value of total private equity portfolio investment last year. Our data set is utilised to profile the characteristics of private equity targets and identify potential targets in the Northern regions. The profiling of private equity targets, using a multivariate technique that assesses all firm level characteristics simultaneously, generates a range of significant characteristics. Private equity targets tend to be established companies in terms of age and size and are more likely to have a higher proportion of tangible assets. The targets are in stable industry sectors with a lower than average failure rate and are less likely to be diversified (single product) Amongst the riskier sectors private equity investors have a preference for advanced manufacturing technologies and the high technology end of the services sector. The firms that private equity investors target are generally cash generative, profitable and have high interest coverage ratios on existing debt. The target firms are likely to have borrowed and have charges on assets. These firms have lower levels of equity and lower than average productivity thus providing opportunities for investors to realise performance improvement, and growth, post investment. The model identifies a total of around 1187 potential prime private equity targets in the Northern Regions that represents 36% of the total identified targets. Depending on whether analyses include full accounts with or without the productivity determinant, or are based on the full sample estimation and the 2009 2013 sub samples, we find that the number of medium sized PE targets in the Northern regions ranges from 689 to 293, and the number of large PE targets ranges from 1399 to 794. We model firm level productivity using a multivariate technique that isolates the efficiency differences in firms attributed to technological progress, knowledge and know how, management practices and other factors that increase efficiency (i.e. total factor productivity (TFP) We find a positive productivity differential of PE backed firms over the control group of companies of around 5.1% throughout the whole period, which is stronger in the pre recession period (around 6.4% The differential is around 4.1% above the control sample, in the recession and post recession period. The models are re estimated on the subsample of firms in the northern regions and reveal a stronger relative performance of private equity portfolio companies relative to the control sample (7.5% to 9.1% with a particularly strong performance in the more recent period. We find a positive profitability differential for PE over other company types of between 2.0% and 3.5% The differential is higher in the recession period and strongly significant. The results hold for the models estimated using the northern region subsample of firms only. We find a rolling three year compound annual growth rate (CAGR) in employment of around 3% showing that achieved productivity improvements are not at the expense of employment. Private equity portfolio companies appear to be particularly resilient in the recession period. We find no significant differences of growth rates for firms in the Northern region compared to the PE invested population.