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BVCA Annual Report on the performance of Portfolio Companies, VII

1 BVCA Annual Report on the performance of Portfolio Companies, VII

This is the seventh edition of the annual report on the performance of Portfolio Companies, a group of large, private equity-owned UK businesses that met a set of defined criteria at the time of acquisition. Publishing this report annually is one of the steps adopted by the PE industry to improve transparency and disclosure, under the oversight of the Guidelines Monitoring Group (GMG).

This year’s report sees the number of Portfolio Companies decline to 71 as at 31 December 2013 (versus 72 in 2012), albeit with a record level of activity when adding both new investments and exits. The report is based on information provided on the Portfolio Companies by the PE firms that own them. This year, data was received covering 68 Portfolio Companies, a compliance rate of 96%, a second year of improvement, but still below the 100% in earlier years.

With a large number of Portfolio Companies, and now seven years of information, this report provides a comprehensive and detailed insight into the effect of PE ownership on large, UK businesses. As the study notes, it is possible to make a wide range of claims about the effect of PE ownership if the fact base is limited to any one or two examples. This report aggregates data across a defined set of businesses, which gives a robust fact base. The overall findings of this study are clear, that the effect of PE ownership on business performance is positive. In 2013, some measures of business performance showed a notable uptick.

As in the prior six years, EY, as advisors to the BVCA, has worked with them to conduct this research and jointly publish its findings. Both parties welcome comments and suggestions on this report to the contact details on the back page.

Yours faithfully,

BVCA & EY

Foreword

2BVCA Annual Report on the performance of Portfolio Companies, VII

Summary Findings 3

Population and compliance 4

Returns attribution 5

Employment 6

Employment cost and pensions 7

Investing 8

Productivity 9

Financial leverage 10

Trading performance 11

Appendices

Appendix A: List of Portfolio Companies 13

Appendix B: Movement in the number of Portfolio Companies, 2007–13 15

Appendix C: Report objectives and definitions 16

Appendix D: Methodology 17

Contents


This report presents findings from a robust data set, covering almost all of the largest UK businesses owned by PE investors.

► There were 71 Portfolio Companies at the end of 2013, a decline of one from the prior year.

► 68 Portfolio Companies complied with the request to provide data for this report, or 96% of the population, which is +4% on the prior year.

► At acquisition, the 68 Portfolio Companies that submitted data were worth £92bn, received £32bn in equity investment from PE funds, and had 415,500 employees.

Analysing the last seven years of data on current and past Portfolio Companies shows positive effects of PE ownership, judged by growth in investment, productivity, revenue, profit and return to equity investors. In aggregate, and through the challenging economic environment since 2008, the wide range of metrics that have been analysed find none with a material negative effect from PE ownership, and the increased financial leverage that it can bring.

► 35 Portfolio Companies exited by PE investors in the period 2005–13 created gross equity gains well in excess of comparable public company benchmarks, by a factor of 6.5x. PE strategic and operational improvement and the net financial benefits of additional leverage, in broadly equal amounts, explain this significant outperformance.

► Organic employment growth is positive under PE ownership, at an average of 0.3% per annum. This compares to 0.8% private sector employment growth in the UK over a similar timeframe.

► Growth in average employment cost (the best proxy for employee compensation) is positive under PE ownership. This has grown at an average of 0.4% per annum, compared to the UK private sector at 2.1%. In the Portfolio Companies, most employment growth has been in jobs where employment cost is below the average for the data set.

► Investment in capital employed, and particularly in capital expenditure, is also positive under PE ownership. Operating capital employed has grown at an average 1.9% per annum, a little behind the public company benchmark of 2.5%.

► Growth in productivity is positive under PE ownership, at 3%

per annum in labour productivity and 7.9% per annum in capital productivity. Compared to the public company benchmark of 0.3%, there is significant outperformance in capital productivity growth. Labour productivity growth is ahead of the UK economy at 1.8% over an equivalent period.

► Portfolio Companies have higher financial leverage than public companies, by a factor of 2.4x. However, Portfolio Companies also reduce financial leverage faster than public companies — and this is after significant investment is made in bolt-on acquisitions. The benefit of higher financial leverage is the increase in gross equity return.

► Revenue and profit growth is positive under PE ownership, at c.6% per annum. This is well ahead of public company benchmarks of 2.6% and 3.9% respectively. This drives the PE outperformance in equity returns.

► All of these findings evidence the effects of the economic downturn from 2009 in both the Portfolio Companies and the UK private sector, economy and public company benchmarks. Overall, the performance of the Portfolio Companies has been resilient despite their higher financial leverage.

► Behind each of these points is a wide variation in performance across individual Portfolio Companies. The effect of PE ownership is judged best by the aggregated information presented in this report, rather than any one or two examples, whether good or bad.

The latest year, 2013, shows more positive findings for the Portfolio Companies than the recent past.

► There was a record level of activity in 2013, versus the six prior years of this report, based on the total number of new investments and exits.

► 2013 saw the fastest rate of organic profit growth over the past six years at 6.3%, and a similar strong pickup in organic revenue growth at 7.2%. This was due to growth in capital expenditure and operating capital employed (both also the highest over the past six years). There was strong growth in labour productivity and average employment cost, ahead of benchmarks, offset by a slight decline in organic employment growth.

Summary Findings


Population and compliance

Number of Portfolio Companies At 31 December 2013, there were 71 Portfolio Companies that met the Guidelines Monitoring Group (GMG) criteria, one less than the prior year. Behind this slight reduction, there was a record level of activity, with 20 combined exits and entries which is the highest since the study commenced in 2007. Five of the Portfolio Companies that exited the population also count as entrants, but with new PE investors. Details of the annual movements in the number of Portfolio Companies are in Appendix B.

Fig 1: Number of Portfolio Companies at 31 December

42 47 43

60 65 66 68

48 6 3

4247

43

64

73 72 71

2007 2008 2009 2010 2011 2012 2013

Compliant PCs Non-compliant PCs

The number of Portfolio Companies that complied with the request to provide performance data for this year’s report was 68. The rate of compliance increased to 96% from 92%, and marked the second year of improving compliance. The target for compliance remains 100%.

Size and sector profile of Portfolio CompaniesThe 68 Portfolio Companies were acquired for a total consideration of £91.5bn in entry enterprise value (EV), represented by £32.0bn of equity investment and £59.5bn of net debt. This represented an aggregate valuation multiple at acquisition of 11.7 x EBITDA (earnings before interest, tax, depreciation and amortisation) and net debt multiple of 7.6 x EBITDA. At acquisition, the Portfolio Companies accounted for 415,507 jobs, of which 85% were in the UK.

As shown in Fig 2, the Portfolio Companies cover a broad range of size as measured by entry EV. For most performance measures, this report uses weighted averages, which are the best representation of economic impact.

Using weighted averages increases the importance of the larger companies; for example, the 25 Portfolio Companies with entry EV greater than £1bn represent 37% of the number of companies, 73% of the total EV and 51% of total employees.

Fig 2: Size mix by enterprise value at acquisition

175.7 61,666

26

19.3140,856

25

66.5212,985

Portfolio Companies EV Employment

<£500m £500m–£1b >£1b

The Portfolio Companies are active across a wide range of industry sectors; see appendix A for the full listing. As can be seen in Fig 3, there is a strong focus on the consumer services and consumer goods sectors, which together account for 66% of jobs. This is a higher share of employment than for companies quoted on the London Stock Exchange (LSE) and the economy overall, where these sectors account for 40% of employment.

Fig 3: Industry sector mix of employment: Portfolio Companies, LSE companies and UK economy private sector

PortfolioCompanies

LSECompanies

UK Economy

Telecommunications

Oil & gas

Technology

Financials

Utilities

Industrials

Health care

Consumer goods

Consumer services

In several charts, aggregated data is presented for current Portfolio Companies and Portfolio Companies owned and exited by PE investors, measured from date of acquisition to latest date or exit, respectively. This maximises the number of data points, and is referenced by “Total portfolio (CP + exits).”

n = 415.5k

n = 68 £91.5bn n = 415,507

n = 19,080k n = 26,432k

Change in criteria


Returns attribution

Private equity vs. public equity returnThe Portfolio Companies owned and exited by their PE owners have achieved gross investment return significantly in excess of benchmarked public company returns, by a factor of 6.5x; as in Fig 4, the benchmarked stock market return is only 15% of the total gain. This strong level of investment performance should be to the benefit of the pension funds, insurance companies and other investors in PE. The addition of data on the exits in 2013 has changed the source of value creation away from additional leverage, due to the benefit of one successful PE investment where additional leverage does not explain any of the value created. See Appendix D for details of methodology and a change implemented this year.

Analysis of the sources of the PE investment returns shows that the gain over and above stock market return is split broadly evenly between additional leverage (46% of the total gain) and PE strategic and operational improvement (39% of the total gain), i.e., there is a significant element of the return that relates to the out-performance of the Portfolio Companies during PE ownership, beyond that of public companies, and over and above the net beneficial impact of additional financial leverage.

Fig 5 shows how the pattern of returns attribution changes with investment performance, i.e., by ranking the exits into four quartiles (noting that with only nine data points in each group the result is directional).

There is a strong, positive correlation of PE strategic and operational improvement with overall investment gain, and in the top two quartiles this is material. However, the PE strategic and operational improvement effect is not always positive; in the bottom quartile the investment return is negative due to a mix of the adverse impact of additional leverage and PE strategic and operational improvement.

There is limited correlation of stock market return with absolute PE performance, again indicating that PE-owned companies perform differently to their listed peers.

Lastly, the additional leverage effect also tracks the level of absolute gain. The effect of additional leverage in the PE model is that less equity is invested with the same increase in enterprise value, thereby boosting the equity return. The same is also true on the downside, in that a reduction in enterprise value creates a bigger decline in equity return. Despite the data set tracking through the 2008–09 downturn and the high levels of financial leverage, to date over 75% of the PE Portfolio Company exits have achieved a positive gross equity gain.

Fig 4: Returns attribution, Portfolio Company exits 2005–13, N = 35

57%46%

14%

15%

29%39%

0%

20%

40%

60%

80%

100%

Exits to 2012 (N = 28) Exits to 2013 (N = 35)

PE strategic and operational improvement

Stock market return

Additional leverage

Fig 5: Returns attribution by quartile, Portfolio Company exits 2005–13, N = 35

Bottom quartile

Thirdquartile

Secondquartile

Topquartile

PE strategic and operational improvement

Stock market return

Additional leverage


Employment

Organic employment growthThe best measure of employment growth in the Portfolio Companies is organic growth, i.e., removing the effect of both bolt-on acquisitions and partial disposals. On this measure, aggregating all current and past Portfolio Companies under the period of PE ownership from acquisition to latest date or exit, organic employment has grown by 0.3% per annum. This result is slightly behind the employment growth in the UK private sector, which is 0.8% over an equivalent timeframe. This difference may reflect differences in PE ownership, and/or the differing exposure to sector trends notably UK consumer expenditure which has been subdued over much of this period.

The pattern of year-on-year organic employment growth is also interesting, particularly as it tracks performance through the economic downturn, and subsequent slow recovery, of the last six years. As can be seen in Fig 7, Portfolio Companies reduced employment in 2009, slightly less than in the UK private sector overall. Employment growth turned positive in 2010 and particularly 2011, well ahead of the broader economy, as Portfolio Companies sought to restart growth. The decline in organic employment growth in 2013 is due to actions taking place in a small number of larger Portfolio Companies, as new owners seek to recover previous levels of performance.

It is important to note that behind the total results and averages, there is a wide range of organic employment growth at the individual Portfolio Company level, reflecting specific market, competitive and management factors. As can be seen in Fig 8, there are a number of Portfolio Companies where the change in employment has been plus or minus 50% since investment by PE, as well as a number of Portfolio Companies where employment has doubled (>100%). This wide range of outcomes creates the potential for selection bias in how the impact of PE ownership can be portrayed — good and bad. By aggregating across a consistent population of businesses, the true effects can be seen.

Fig 6: Organic employment growth since acquisition, N = 81

0.3%0.8%

0%

1%

2%

3%

Total portfolio (CP + exits) ONS benchmark–UK private sector

Fig 7: Year-on-year organic employment growth

0.4%

–1.6%

0.2%

2.0%

1.4%

-0.3%

0.5%

–2.1%

–1.1%

0.1%

1.4%

2.7%

2008 2009 2010 2011 2012 2013PCs employment growth ONS benchmark–UK private sector

41 46 53 59 59 65N

Fig 8: Organic employment growth since acquisition vs. time since acquisition, N = 81

–100%

–50%

0%

50%

100%

150%

200%

0 2 4 6 8 10

Org

anic

em

ploy

men

t gro

wth

(abs

olut

e)

Time since acquisition (years)

Portfolio Companies Exits Weighted average by year


Employment costs and pensions

Employment cost per head growthThere is no easy, single measure of like-for-like change in employee compensation across a group of large companies, due to changes in composition of companies, numbers of employees at differing pay levels, employment tax as well as like-for-like compensation. We have analysed employment cost per head as the best proxy for employee compensation, which shows that the Portfolio Companies have grown this measure by 0.4% per annum under the entire period of PE ownership. This is positive, but less than the 2.1% per annum growth in the UK private sector as a whole.

The year-on-year growth trend shown in Fig 10 provides further analysis of employment cost per head growth for the Portfolio Companies in each year, versus the UK private sector benchmark. This shows a more variable pattern, with the Portfolio Companies ahead of the benchmark in three of the six years, and behind in the other three. In 2011, the decline in employment cost per head took place when organic employment growth rose to its highest level over this period, suggesting some element of mix shift, i.e., more growth in jobs where employment cost is below average for the data set. In 2012 and 2013, as organic employment growth has declined, the employment cost per head has increased, and was above the UK private sector benchmark.

Another element of employee compensation is pension, and pension contributions are included in the analysis of total employment cost per head shown above. The pension regulator is responsible for reviewing pension arrangements including at the time of change in ownership, and PE investors comply with these procedures. In the current portfolio of 68 companies, there has been one instance of a defined benefit scheme being discontinued, whilst three have been initiated, along with four new defined contribution schemes.

As shown in Fig 11, one issue facing the Portfolio Companies, along with all other providers of defined benefit schemes, is the persistent low interest rate environment that creates accounting net liabilities in defined benefit schemes.

Fig 9: Growth in employment cost per head, N = 81

Fig 10: Year-on-year average employment cost per head growth

Fig 11: Year-on-year defined benefits schemes balance: deficit as % of liability (accounting basis)

0.4%

2.1%

0%

1%

2%

3%

Total portfolio (CP + exits) ONS benchmark–UK private sector

6.4%

1.8%

–0.2%

–1.8%

1.7%

5.0%

2.3%

0.8%

2.4% 2.3%

3.3%3.8%

2008 2009 2010 2011 2012 2013

PCs employment cost per head y-o-y growthONS benchmark–UK private sector

–0.4%

–10.5%

–5.5% –5.6%

–7.0% –7.2%

2008 2009 2010 2011 2012 2013

deficit as % of liability

N 41 46 53 59 59 65

N 41 46 53 59 59 65


Investing

Growth in operating capital employedIn addition to change in labour resources, both in number and average cost, we have analysed change in capital resources, best measured overall as operating capital employed, or the sum of working capital and tangible fixed assets.

The Portfolio Companies, in aggregate, have grown operating capital employed by just under 2% per annum during the entire period of PE ownership. Around 80% of this increase has come from organic investment, with the remaining change from the net effect of acquisitions and disposals.

To benchmark this performance, we have analysed public companies on this same metric which show a slightly faster rate of growth of 2.5%, on a time and sector matched basis (see Appendix D for methodology).

The year-on-year growth in operating capital employed shows more variation — for the Portfolio Companies and the public company benchmark. In 2009–10, when the UK economy was most fragile, the Portfolio Companies tightened their control of operating capital employed by reducing capital expenditure (see Fig 14) and working capital, leading to reductions in operating capital employed. Since then, they have increased capital expenditure, and for the last three years growth in operating capital employed has been positive — and well ahead of the public company benchmark. Operating capital employed grew at its fastest rate over the past six years in 2013, as did growth in capital expenditure.

Fig 12: Growth in operating capital employed since acquisition, N = 81

1.9%2.5%

0%

1%

2%

3%

Total portfolio (CP + Exits) Plc benchmark

Sources Increase in op. cap. (£bn) Percent of growth (%)

Acquisitions and disposals

2.4 0.38%

Organic 9.6 1.51%

Total 12.0 1.90%

Fig 13: Year-on-year operating capital employed growth

3.3%

n/a

–3.9%

–0.2%

1.6% 1.2%

3.9%

5.6%

10.3%

–1.7%–0.6%

1.9%

2008 2009 2010 2011 2012 2013

Operating capital employed Plc benchmark

N 41 46 53 59 59 65

N 41 46 53 59 59 65

Fig 14: Year-on-year capital expenditure growth

5.5%

–11.1%

3.2%

10.6%7.9%

15.6%

2008 2009 2010 2011 2012 2013


Productivity

Labour productivity growthIn aggregate, the Portfolio Companies have grown labour productivity by 2.0% during the entire period of PE ownership, which is slightly above the UK economy-wide benchmark of 1.8% per annum. However, as shown, there is one Portfolio Company that, for particular reasons, has a significant effect on both labour and capital productivity. Excluding this shows labour productivity growth of 3.0%, over 1ppt ahead of the UK economy benchmark.

Fig 17 shows the year-on-year growth in labour productivity. The result in most years is influenced by the rate of organic employment growth, with slower employment growth leading to faster productivity growth in that year, and vice versa. In 2013, the latest year, labour productivity grew by 5.2% in the Portfolio Companies, whilst organic employment growth was slightly negative.

Capital productivity growthIn terms of capital productivity growth, measured in this report as revenue to operating capital employed, the Portfolio Companies have demonstrated strong performance in absolute terms and when compared to the public company benchmark. Excluding one outlier, capital productivity has grown at 7.9% per annum during the entire period of ownership by PE investors, well ahead of the public company benchmark that is just positive.

Again, the year-on-year trends in capital productivity growth in Fig 17 show some correlation with growth in capital employed in Fig 13. In 2009 and 2010, a contraction in operating capital employed in part enabled strong growth in capital productivity. In recent years, capital employed has grown considerably whereas capital productivity growth has been slow.

Fig 15: Growth in Gross Value Added (GVA)/employee since acquisition, N = 81

Fig 16: Growth in capital productivity since acquisition, N = 81

Fig 17: Y-o-y growth in capital productivity and growth in GVA/employee

2.0% 1.8%

0%

1%

2%

3%

Total portfolio (CP + Exits) ONS benchmark–UK economy

3.0% exc. one outlier

15.3%

0.3%0%

4%

8%

12%

16%

Total portfolio (CP + Exits) Plc benchmark

7.9% exc. one outlier

6.1%

8.0%

4.9%

6.7%

0.5%

2.7%

7.5%

3.1%

0.3%

–1.9%

2.0%

5.2%

2008 2009 2010 2011 2012 2013

Y-o-Y growth in capital productivity Y-o-Y growth in GVA/employee

41 46 53 59 59 65N


Financial leverage

Debt ratioOne feature of the PE business model is to use greater financial leverage than the typical public company. More debt and less equity at the time of acquisition increases the effect of change in EV at exit on equity return, both up and down.

As shown in Fig 18, on one common measure of leverage, the ratio of debt to EBITDA, the Portfolio Companies have more than double the amount of debt, per £ of EBITDA, than their public company benchmark, i.e., 8.0 at the time of acquisition versus 3.4.

Change in leverage ratioFig 18 also shows that the Portfolio Companies are more focused on reducing their leverage than the public company benchmark. For the current portfolio, the ratio of debt to EBITDA has declined from 8.0 to 6.6, a reduction of 1.4 turns. Over the same period, the public company benchmark has reduced leverage ratio by 0.5 turns.

The reduction in leverage ratio is achieved by growing profits faster than debt, as evident in Fig 19. This shows that the Portfolio Companies have increased net debt since acquisition. Cashflows generated by the Portfolio Companies after investing in capital expenditure and meeting all interest and tax payments total £9.2bn, measured from the time of acquisition to latest date. However this has been used to fund bolt-on acquisitions totalling £8.6bn, and make net dividend payments to equity investors totalling £2.1bn, meaning that net debt has grown from £60.3bn to £61.7bn. However, as EBITDA has grown faster, the leverage ratio has declined by 2.0 turns.

The dividend payments of £2.1bn, or 6.6% of initial equity invested, approximates to an annual average yield of c1.3%, which is below the current yield on the London main market of c3%.

Fig 18: Opening and latest debt to EBITDA ratio, current portfolio, N = 65

Fig 19: Capital structure–acquisition to latest date current portfolio, N = 65

8.0

3.4

6.6

2.9

Opening–PCs Opening–Plcbenchmark

Latest–PCs Latest–Plcbenchmark

Net debt (£bn) Acquisition to latest date

Net debt/EBITDA

Opening net debt 60.3 7.6

Debt-funded acquisitions (net) 8.6

Net equity withdrawals 2.1

Operating cash flow post investing and funding charges (9.2)

Change in net debt 1.5

Net debt at latest date 61.7 5.6


Trading performance

Reported revenue and EBITDA growthThe combination of growth in capital and labour productivity, with slower albeit positive growth in capital and labour resources, leads to growth in revenue and profit of c6%, measured for all Portfolio Companies from the date of acquisition to latest date or exit. For many of the Portfolio Companies, this result in part reflects more challenging trading during the economic downturn.

This level of revenue and profit growth exceeds the public company benchmark by two to three percentage points, and is a major factor in explaining the PE outperformance evident in the returns attribution analysis. As shown in this report, the fast growth stems from greater productivity growth rather than resource investment.

Organic revenue and EBITDA growthReported revenue and EBITDA growth include the effects of organic and inorganic growth, i.e., bolt-on acquisitions and partial disposals. The Portfolio Companies, under PE ownership, invest more in acquisitions than realised through partial disposals. This has been shown in the analysis of investment, and is evident in trading performance as reported growth exceeds organic growth by 2.4% and 1.1% per annum for revenue and EBITDA, respectively.

Looking at year-on-year growth in organic revenue and EBITDA, the economic downturn contributed to reduced organic growth from 2009. Indeed, slower growth in organic revenue and EBITDA continued through to 2012. The latest year, 2013, shows a notable pickup in performance with an organic revenue growth rate of 7.2% and organic EBITDA growth of 6.3% — the fastest over the past six years. As seen earlier, this results from strong growth in capital employed and labor productivity in the year.

Fig 20: Revenue and EBITDA growth since acquisition, N = 81

Fig 21: Reported and organic revenue and EBITDA growth, N = 81

Fig 22: Year-on-year organic revenue and EBITDA growth, current portfolio

Revenue Plc benchmark

Plcbenchmark

EBITDA

5.8%

2.6%

6.0%

3.9%

0%

2%

4%

6%

8%

5.8%

3.4%

6.0%4.9%

0%

2%

4%

6%

8%

Revenue EBITDAOrganic revenue

Organic EBITDA

8.4%

3.0%

1.0%

2.9%

1.4%

7.2%6.2%

2.8%1.9% 1.8%

3.6%

6.3%

2008 2009 2010 2011 2012 2013PCs organic revenue growth PCs organic EBITDA growth

41 46 53 59 59 65N

Appendices


Appendix A List of Portfolio Companies

Portfolio Companies (at 31 December 2013)

Portfolio company GP(s)

Acromas (AA/Saga) Charterhouse, CVC, Permira

Affinity Water Morgan Stanley, Infracapital

Airwave Solutions Macquarie

Alliance Boots KKR

Ambassador Theatre Group1 Providence Equity, Exponent

AMCo Cinven

Annington Homes Terra Firma

Associated British Ports GS Capital, Infracapital, Borealis, GIC

B&M Retail1 CD&R

Biffa Sankaty Advisors, Babson Capital Europe, Angelo Gordon, Avenue Capital

Birds Eye Iglo Permira

Brakes Group Bain Capital

Brit Insurance CVC, Apollo

British Car Auction CD&R

Camelot Ontario Teachers’ Pension Plan

Card Factory Charterhouse

Care UK Bridgepoint

CenterParcs Blackstone

Civica2 OMERS PE

David Lloyd Leisure1 TDR Capital

DFS Advent

Domestic and General Group2 CVC

DX Group Arle Capital Partners

Edinburgh Airport Global Infrastructure Partners

Enserve Cinven

Equiniti Advent

Eversholt Rail 3i, Morgan Stanley infra, STAR Capital

Exova CD&R

Expro Goldman Sachs

Fat Face Bridgepoint

Findus Group JP Morgan, Highbridge Asset management, Lion Capital

Fitness First Oaktree, Marathon

Four Seasons Health Care Terra Firma

Gala Coral Apollo, Cerberus, Park Square, York Capital Management

Gatwick Airport Global Infrastructure Partners

Gondola Holdings Cinven


Host Europe Group1 Cinven

Integrated Dental Holdings Ltd Carlyle

John Laing Henderson

London City Airport Global Infrastructure Partners, Highstar Capital

Moto Macquarie

National Car Parks Macquarie

New Look Permira, Apax

Northgate Information Solutions KKR

Odeon & UCI Cinemas Terra Firma

Osprey (Anglian Water Group) 3i, Colonial First State Global Asset Management, Canadian Pension Plan Investment Board

Partnerships in Care Cinven

Pets at Home KKR

Phones4U BC Partners

PHS Charterhouse

Pret a Manger Bridgepoint

Priory Group Advent

RAC Carlyle

R&R Ice Cream1 PAI Partners

SAV Credit Varde Partners

South Staffordshire Water2 KKR

Spire Healthcare Cinven

Stonegate Pub Company TDR Capital

Thames Water Macquarie

The Vita Group TPG

Tomkins* Onex Partners, Canadian Pension Plan Investment Board

Top Right Group Apax

Trader Media Apax

Travelex Apax

Travelodge Goldman Sachs, Golden Tree Asset Management, Avenue Capital Group

TSL Education2 TPG

United Biscuits Blackstone, PAI

Virgin Active CVC

Viridian Group Arcapita

Vue Cinemas2 OMERS PE

World Pay Advent, Bain


Exits of Portfolio Companies during 2013


Civica2 3i

Domestic & General2 Advent

Enterprise 3i

ESG3 3i

Just Retirement Permira

Portfolio Companies in bold text are those GPs and Portfolio Companies that have not complied; *indicates where the GP has provided an explanation for non-compliance.Note 1: Denotes Portfolio Companies that are new entrants. Note 2: Denotes Portfolio Companies that have exited and re-entered population during the year with new PE owners. Note 3: Denotes Portfolio companies that have been excluded from the sample after consultation with the GMG.


Kellen Terra Firma

Merlin Blackstone, CVC

Park Resorts Global Infrastructure Partners

South Staffordshire Water2 Alinda Capital

TSL2 Charterhouse

Vue Cinemas2 Doughty Hanson


Appendix B Movement in the number of Portfolio Companies, 2007–13

2007 2008 2009 2010 2011 2012 2013

At 1 January 37 42 47 43 64 73 72

Portfolio Companies introduced/excluded with changes in GMG criteria

12 4 (2) (1)

Acquisitions of Portfolio Companies

10 5 – 11 8 7 10

Exits of Portfolio Companies (5) – (4) (2) (3) (6) (10)

Portfolio Companies at 31 December 42 47 43 64 73 72 71

Exits and re-entrants 1 - - 1 1 3 5

► In 2010, the criteria used to determine the Portfolio Companies were changed by the GMG, by lowering the entry enterprise value threshold. This brought in a total of 16 new Portfolio Companies. In 2012, the GMG decided that one “PE-like” investor entity that owned two Portfolio Companies had restructured in such a way that it was no longer PE-like. In 2013, the GMG decided that one portfolio company, that had made significant disposals and was, as a result, well below the size criteria, would be excluded from the population.

► The effect of private equity ownership on a business is evaluated from the date of acquisition to the date of exit. The

date of exit is defined as the date of completion of a transfer of shares which means that the private equity fund no longer has control, or, in the case of IPO onto a public stock market, the date of first trade.

► Between 2007 and 2013, there have been 11 Portfolio Companies which have exited the population and then re-entered under the ownership of a new private equity fund. Five of these transactions took place in 2013.


Appendix C Report objectives and definitions

Report objectivesThis study by the BVCA, and its appointed advisor EY, reports on the performance of the large, UK businesses owned by PE firms that meet the criteria determined by the GMG — the Portfolio Companies. It forms part of the actions implemented by the PE industry to enhance transparency and disclosure.

The objective of this annual report is to present independently prepared information on the performance of Portfolio Companies during their period of ownership by private equity investors. By aggregating information on the businesses that meet a defined set of criteria at the time of their acquisition, there is no selectivity or performance bias in the resulting data set. This is the most accurate way of understanding what happens to businesses under private equity ownership. For example:

► What growth rates are achieved by private equity-owned businesses?

► How does private equity ownership affect employment, particularly in the UK?

► How do private equity-owned businesses perform on employment cost, pensions and productivity?

► Do businesses owned by private equity investors invest in capital expenditure?

► Is there evidence of acquisitions and/or asset disposals under private equity ownership? How do such acquisitions and disposals affect overall performance in trading, employment and investing?

The findings of this report are a unique source of information to inform the broader business, regulatory and public debate on the impact of private equity ownership, by evidencing if and how its distinctive features (including investment selection, governance, incentives and financial leverage) affect the performance of large, UK businesses.

Definition of Portfolio CompaniesA portfolio company, as defined for this report, meets the criteria set out by the GMG. A portfolio company, at the time of its acquisition:

► “ Acquired by one or more private equity firms in a public to private transaction where the market capitalisation together with the premium for acquisition of control was in excess of £210 million, and either more than 50% of revenues were generated in the UK or UK employees totalled in excess of 1,000 full time equivalents”

► “ Acquired by one or more private equity firms in a secondary or other non-market transaction where enterprise value at the time of the transaction is in excess of £350 million, and either more than 50% of revenues were generated in the UK or UK employees totalled in excess of 1,000 full time equivalents”

► Private equity firms are those authorised by the FSA that manage or advise funds that own or control Portfolio Companies, or are deemed after consultation on individual cases by the GMG to be “private equity like” in terms of their remit and operations

The companies and their investors, who meet the criteria were determined by the BVCA and approved by the GMG. As in prior years, the investee companies that volunteered to comply with the guidelines, but did not meet all of the criteria at acquisition, are excluded from this report.

Private equity firms were requested to complete a data template, specified by the BVCA and EY, for each of their Portfolio Companies, for the purposes of preparing this report.


Appendix D Methodology

ProcessThe approach to producing the “Annual Report on the Performance of Portfolio Companies” has been debated and agreed with the BVCA and the GMG.

EY contacted the private equity firms in July 2014 and requested a standard data template to be completed for each portfolio company. For exits, the same data template was updated for the final year of private equity ownership, as well as data required to complete the returns attribution analysis. Completion of the data template drew on information available in company accounts, and further information that was prepared from portfolio company and private equity firm sources. This further data enabled analysis, inter alia, of the impact of acquisitions and disposals, and movements in pension liabilities and assets.

The data returned to EY was checked for completeness, and iterated with the private equity firms as required. EY undertook independent checks on a sample of the returns against published company accounts. This found no material discrepancies. Data gathering was completed in November 2014.

Measuring performanceThe data set is built up from the individual companies under their period of ownership by Private Equity investors. For new entrants, these are typically excluded from the latest financial year data as there is insufficient elapsed time between the date of acquisition and the latest financial year end to enable a meaningful measure of performance. The number of data points used in this report is determined as follows:

► The 2013 year on year growth number of data points of 65 comprises 58 current Portfolio Companies, i.e., 68 less 10 new extrants, plus 7 of the 10 exits where exit dates meant that the last year was appropriate to include. This is consistent with prior years of reporting.

► For exits, there have been 30 exits over the period 2007–13 plus a further 10 in 2005–06 that were also covered in this process. Data to calculate returns attribution has been provided for 35 of the 40, a compliance rate of 88%.

► The number of data points measured by Total portfolio (CP + exits) of 81 comprises the 65 as above, plus data on a further 16 exits. In total this data set includes 23 of the 35 exits, as 12 of the exits in the period 2005–07 were not required at the time to provide details beyond that required for returns attribution.

Publicly listed benchmarksThe public company benchmarks are drawn from an initial total of 2,671 companies listed on the London Stock Exchange (LSE) to 31 December 2013, from which 1,635 companies are excluded for the purposes of this report:

► 902 equity Investment trusts, OEICs and other financial or non-comparable sector entitles (e.g., Real estate Investment and services, real estate investment Trusts, Banks, Equity and Non-equity investment instruments).

► 472 companies were excluded because their market capitalisation was less than £210mn, the size threshold for take-privates in the GMG criteria.

► 261 companies were excluded because their market capitalisation was greater than £11bn (the market capitalisation of the largest portfolio company).

This results in 1,036 public companies in the benchmark group.

For the sector-weighted public benchmark, public company data is aggregated at an industry group level — as defined by the Global Industry Classification Standard — and then matched to individual Portfolio Companies. The aggregate result is then weighted by the sector mix of the Portfolio Companies.


Issues with approach to benchmarkingThere are a number of issues with regard to the approach to benchmarking that may influence the results:

► Reported figures include the effect of acquisitions and disposals, which for public companies in aggregate it is not possible to separately analyse.

► The mapping of companies to Global Industry Classification Standard groups is important to take account of differential trends at the sector level. However, the mapping is high level and may be inaccurate for any individual portfolio company. By contrast, more specific sector mapping reduces the size of the benchmark group.

► For some figures, e.g., employment, the definitions captured in the LSE company databases may not be wholly consistent with the definitions adopted in our data gathering.

Returns attributionThe “returns attribution” calculation analyses the equity multiple into three components:

1. Additional leverage: The effect on equity multiple of the additional leverage PE firms place on a company above the average public company sector levels

► Adjusted deal returns are calculated by adjusting the capital structure to match average leverage levels of LSE sector benchmarks. The adjusted capital structure takes into account interest savings over the holding period as well as the changes in net debt that took place during ownership

► In addition, any leveraged dividends received by equity investors are moved to the date of exit, and the exit capital structure adjusted for dividends

► The difference between original deal equity multiple and the adjusted equity multiple is the benefit of additional leverage

2. Market returns: The Total Shareholder Return (TSR) earned in the LSE sector over the same timeframe as the private equity investment

► The TSR is calculated using public stock market indices. TSR captures the effects of sector earnings growth, multiple changes and dividend payments

► The public stock market return TSR is converted into an equivalent equity multiple figure and applied to a deal return that has equivalent capital structure after the adjustment for additional leverage

3. PE strategic and operational improvement: The component of equity multiple that relates to above benchmark performance

► The component of the equity multiple for PE strategic and operational improvement is calculated by subtracting the market return from the equity multiple adjusted for additional leverage

Note that, in prior years, the same methodology was applied to deal returns measured by Gross IRR. The methodology change improves the aggregation of positive and negative return deals, and has increased the attribution to leverage versus prior-year reports.

Contacts

Contacts

BVCAJoe Steer + 44 20 7492 0416

Gurpreet Manku + 44 20 7492 0454

EY LLPHarry Nicholson + 44 20 7951 5707

Michael Panagopoulos + 44 20 7951 4024

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