The Importance Of Being Earnest - FTSE

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12 SPOTLIGHT Private equity’s steady fightback PE firms that take a back seat do better than proactive PE managers THE GLOBAL MANAGEMENT consulting firm AT Kearney says in its latest study of the European private equity (PE) market that many private equity portfolios are staging a postrecession comeback and are outperforming non-PE-owned industry peers. The report analyses PE transactions in four core European markets, the United Kingdom, DACH (Germany, Austria & Switzerland), France and the Nordic countries, and illustrates the meteoric rise and fall of the industry in recent years, basing its results on the financial performance of more than 100 European PE portfolios versus their public-industry peers. The research has identified the rise of two distinct governance models for PE firms which AT Kearney has labelled “supervisor” and “operator” models. Supervisors are deemed to exhibit trust in the management of the firms in which they invest, and tend to be less involved in tactical decision making. Many of these funds, particularly traditional houses with banking roots, work actively with management at board level. In some jurisdictions, tax considerations Treasury function significantly impacted by rapid growth in emerging markets THE SO-CALLED global supercycle will impact corporate treasuries in a number of ways, as fast growing developing market trade corridors require supply chains to extend into new markets, says Standard Chartered Bank. The growth in these trade corridors is a well established trend but the rate of growth is escalating and over the next 20 years they will be instrumental in driving overall might favour this governance model, which maintains the status of wealthadministrating vehicles. Operators on the other hand are more proactive and add their own dedicated teams to review company strategy and manage operations. Operational teams comprise three to seven professionals for an average European portfolio. Contrary to accepted wisdom, PE firms that take on a supervisory role—giving the deal partner responsibility from acquisition through exit—deliver more value by balancing growth and profitability as this report shows. Success factors such as cash management and managerial discipline are transferable into other industries for those willing to learn from the PE owners. Philip Dunne, partner in the private equity practice at AT Kearney, however, says: “Our study shows that private equity works—period. They’ve taken a PR hit in the recession but the numbers don’t lie—private equity ownership is a successful way of running companies. The PE houses encourage managers to behave like owners, make capital work hard, create an Supercycle opens trade corridors global trade growth in the same period, says the bank. Developing market corridors such as China-Africa, China-Latin America (LatAm) or Middle East and North Africa (MENA) and India will grow at 13% to 18% per annum, while developing-to-developed market corridors, such as China-US, will grow at 13% a year. However, the EU-US trade corridor is expected to show the fastest decline in global importance from 2010 to 2030. George Nast, global head, product management, transaction banking, Standard Chartered, says: “The adaptable investment plan and become an active shareholder. “ The results of the study are telling. Since 2006, PE portfolio companies have outperformed their publicindustry peers on key financial metrics. This has been seen primarily in slow growth industries, such as chemicals (0.3% growth), large consumer goods and retail (4.5%), manufacturing (2.6%) and business services (5.4%). PE portfolios have a higher share of value growers (31% compared to 25%) and a lower proportion than the peer group of underperformers (20% versus 28% in the peer group). Even during 2009 average decline in revenues for PE was 3.8% compared to 9.1% for peers. Michael Ostroumov, one of the authors of the study and a principle in the private equity practice, explains: “At a time when the entire global finance industry is under scrutiny, this study shows that the PE model drives value well beyond wealth creation for the job owners. PE firms rejuvenate portfolio companies, create jobs and open new markets that benefit customers, employees, supplies and the communities in which they operate.” ■ change in the relative importance of the various regions is striking. In 2008, the US and EU were at the centre of the most important trade corridors, [but] by 2030, developing market trade will represent 40% of global trade versus 18% today and only 7% in 1990.” The supercycle will invariably present challenges for corporate treasury strategy. Traditional western locations of treasury functions such as London and New York will almost certainly start to cede precedence to developed Asian locations including Singapore and Hong Kong. ■ M AY 2 0 1 1 • F T S E G L O B A L M A R K E T S
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