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Private Equity: Engaging for Growth

The 2012 Private-Equity Report
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  • Market conditions are accelerating the trend toward making operational value the primary source of value created by private-equity firms.

  • In the future, private-equity firms will increasingly have to create value not by cost cutting but by growing their portfolio businesses.
  • BCG recently interviewed more than 25 general partners, operating partners, and associated portfolio-company CEOs at 15 private-equity firms to learn how they are organizing to meet this challenge.

Four years ago, BCG identified a shift in the private-equity industry away from leverage and toward operational improvement as the primary source of value creation. (See The Advantage of Persistence: How the Best Private-Equity Firms “Beat the Fade,” BCG report, February 2008.) Since then, private-equity firms have been experimenting with a variety of operating models in order to increase their capacity to create value by improving the operations of their portfolio companies.

The 2012 Private-Equity Report
So far, their efforts have been extraordinarily successful. We recently analyzed the operational performance of 89 U.S. and European private-equity deals that were closed between 1998 and 2008 and exited between 2005 and 2011. This sample represents all deals with a minimum enterprise value of €500 million (approximately $670 million) at exit and for which data were available from entry to exit. We found that more than two-thirds of these deals (70 percent) generated an absolute increase in annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least 20 percent—and nearly half the deals generated annual EBITDA growth of 50 percent or more.