What other steps do PE firms take to improve company performance?
A. To succeed today, a PE firm needs to bring much more to the table than financial creativity. According to a 2007 study by Ernst & Young, two-thirds of the earnings growth (before taxes, interest and capital expense) at PE-owned portfolio companies came from business expansion, with organic revenue growth being the most significant element. Cost reductions accounted for only 23 percent of pre-tax earnings growth in U.S. companies. In other words, PE investors add to the company’s strength by implementing significant operational improvements to the business. Another study done for the European Parliament supports this view. The study found that PE-acquired companies outperformed comparable publicly- traded companies in terms of sales (14 percent), earnings before taxes, interest and capital expense (5 percent), and profitability (five percent) growth. The PE firm must add new capabilities to the company it buys (by adding new products), increase competitiveness (by reducing waste and
