5. Development before and after investments by PE
5.1. Companies maintain their growth rate in the buyout segment
The figure below shows the development in value creation and turnover for buyout companies before and after a PE fund invested into the company. The investment year is year zero. We start looking at the companies two years before the PE funds invest in the company. This value is set to 100 and hereafter we analyse the yearly growth from this starting year.
Figure 9: Growth rate before and after PE funds invested in the company in buyout (constant prices). Exited companies are included. Source: Menon Economics
It is demanding to maintain a high growth rate over time, and very few companies manage it. But we see tendencies to increased growth rate in the investment year of private equity funds. The indicates that the funds contribute to both top and bottom line growth in the period following their investment. The growth rate is maintained the following years. From year three after investment the growth moderates before levelling off. This is especially the case when it comes to value creation.
In addition, the portfolio companies are also growing before the acquisition. This shows that the PE funds are focusing on growth companies. The figure shows that growth levels off in year 3 and stabilizes at this level in the following years. This may indicate that the portfolio company has matured during the ownership period and much of the short-term growth potential has been taken out during the first couple of years of the ownership period.
5.2. Early-stage companies experience an immediate increase in their growth rate following investment
The figure below the development in turnover and value creation for early phase companies, from two years before to five years after the PE funds invested into the company. The investment year is year zero It is natural that the early phase companies have a faster growth rate than the buyout segment, as these are smaller companies where capital is invested to make them grow.
Figure 10: Growth rate before and after PE funds invested in the company in the early-stage segment (constant prices). Exited companies are included. Source: Menon Economics
The figure shows clearly that the companies continue the growth rate they had before the PE fund made an investment. This is especially true for growth in value creation. That the growth rate increases are a clear indication that the capital and the expertise contributed by the funds have a positive effect, since it is not unusual that early-stage companies stagnate at the point where they attempt to scale up commercialization. That the development in value creation is somewhat stronger than growth in turnover indicates that the funds are also concerned with the companies’ bottom line.