In 2007, European private equity funds carried out operations for 194 billion dollars and had 197 billion in their coffers; in 2014 operations moved 94 billion, but available firepower rose to 298 billion, according to Preqin data. It therefore seems that sector operators are somewhat embarrassed to move in a world with zero interest, zero inflation, low cost of debt and high market valuations (from 2008 to 2014 the European stock exchanges grew by 85% and the price /earnings ratio went from 10,9 to 21,2).
The paper “Does Private Equity Generate Value?”, edited by Stefano Gatti and Carlo Chiarella of the Baffi Carefin Center at Bocconi, in collaboration with Goldman Sachs, identifies the conflicting pressures to use the money raised without however paying an excessive price and the strong competition from corporate takeovers (corporate acquisitions) the reasons for the still inefficient use that private equity makes of the money raised.
To arrive at these conclusions, the scholars analyze all 31.792 transactions recorded by Bloomberg from 2005 to 2014, i.e. 4.088 private equity transactions for a total value of $648,7 billion and 27.704 corporate takeovers for a value of $2.900 trillion and the divided into three periods. The pre-crisis period (2005-2008) is followed by a post-crisis period (2009-2011), characterized by good credit conditions, low valuations and widespread uncertainty among investors, and by a post-quantitative easing period (2012-2014). XNUMX) characterized by cheap credit, renewed investor confidence and high market valuations.
Data show that, as market prices rise, the relative share of private equity transactions decreases, while corporate takeovers increase, because companies are less concerned about the returns on transactions and more interested in the possible industrial synergies of transactions. Furthermore, if in the pre-crisis period the average size of a private equity transaction was 487 million dollars and that of corporate takeovers 235,7 million, in 2014 the gap has almost disappeared, with values equal to 319,3 and 311,5 million.
The statistical analysis also shows that the decrease in buyouts is almost entirely attributable to the decrease in transactions involving somewhat overheated sectors, with very high market prices. In other sectors, the high price of the target firm does not induce private equity funds to back down.
The researchers of the Baffi Carefin Center conclude by suggesting that the possible reaction of private equity operators to find a destination for the money raised should follow two trajectories already mentioned: the move towards smaller targets (in a Preqin survey 86% of those interviewed such an evolution is expected) and specialization in specific markets, because the competitive advantage of the operators, in an increasingly competitive market, will be given by expertise, ability to select targets and efficient execution of operations. Operators expect differences in private equity activity across sectors, with pharmaceuticals, distribution, technology and media among the most active.
However, a return to pre-crisis levels of operations requires the fulfillment of at least one of two conditions: a substantial improvement in economic prospects or a decisive correction in market prices.
