5. Development before and after investments by PE
5.1. Growth in value creation is strongest three years after investment
The figure below shows the development in value creation and turnover for buyout companies, before and after a private equity fund invested in the company. The year of investment is year zero. We start with the companies two years before the private equity fund invests in the company. Turnover and value creation in the companies at this point are indexed to 100.
Figure 9: Growth rate before and after PE funds invested in the company in buyout (constant prices). Exited companies are included. Source: Menon Economics
Maintaining a high growth rate over time is challenging, and few companies manages to do it. However, we see that the growth in turnover accelerates already in the year that private equity funds invest. The growth rate in value creation, on the other hand, is more moderate in the first two years after investment, before the growth accelerates in year three. This suggests that the funds first contribute to top-line growth after they enter the ownership side, and then increase value creation further into the period. After year four, we see that the growth rate in turnover moderates somewhat, while the growth in value creation actually becomes marginally negative.
It is also interesting to note that the portfolio companies are growing before the acquisition. This shows that the private equity funds focus on companies in growth. The figure shows that the growth is consistently high for several years before it levels off in year four. This may indicate that the portfolio company has matured during the ownership period and that much of the short-term growth potential is realized during the first 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
From the figure, it is clear that the companies experience a distinct shift in growth rate two years after the private equity fund invests. This is particularly true for the growth in value creation. Similar to the buyout segment, we see that the growth in turnover accelerates somewhat faster than the growth in value creation after investment.
The increase in growth rate is a clear indication that the capital and expertise from the funds have a positive impact on the companies, in addition to the fund managers' ability to select companies with growth potential. The positive influence of the funds is particularly evident as it is not uncommon for early-stage companies to stagnate as they attempt to scale their business. The impact is especially prominent in year five after investment, where both turnover and particularly value creation make a significant leap.