After two decades of falling interest rates and rising asset prices, the private equity industry is being asked to show its value-creation mettle. Rather than basking in a market buoyed by climbing multiples, firms are having to fight hard to maintain returns.
The asset class has long extolled its hands-on, operational expertise, of course, but now it is being asked to prove it. Contrary to the marketing spiel, multiple expansion has been the greatest contributor to buyout returns over the past decade, outstripping revenue growth and margin improvement as drivers of value creation.
Over the past five years, multiple expansion accounted for 56 percent of value creation in the average deal, according to data from CEPRES Market Intelligence. Meanwhile, revenue growth and margin expansion accounted for 38 percent and 6 percent, respectively.
This article originally appeared in Private Equity International. Continue reading (opens in new window).