Traversing Private Equity

Private equity is a unique asset class, often distinguished from public equities due to the asset’s illiquidity. This illiquidity has a clear rationale and direct consequences. A fund lifetime of 10 years allows private equity managers to maintain a multi-year horizon for their investment thesis to play out.

In turn, private equity managers’ control position and active ownership of underlying companies materialize over an extended timeline, allowing better alignment interest between shareholders and management. How do private equity funds create the value increase identified in their investment theses and how are they often able to outperform public markets?

In the wake of strong competition and rising valuation multiples, successful fund managers have differentiated themselves by focusing on operational value creation, as a more persistent and replicable way of creating value within their portfolio companies. Persistence in Value Creation Whilst the persistence of performance in private equity funds is a highly debated topic, research has shown that only operational improvement is a replicable source of value creation as compared to the other performance components. “Only operational improvement is a replicable source of value creation”

A Phadia case study further expatiates value creation. Based in Sweden, Phadia is a leading in-vitro allergy diagnostics and autoimmunity diagnostics business. Private equity firm Cinven acquired the company in 2007 with a strategy to assist Phadia in growing its core business in order to reach its full strategic and operational potential.

Under Cinven’s ownership, Phadia transformed into a global leader in the healthcare sector by the time the company was acquired by Thermo Fisher in 2011. Cinven accomplished this through a programme of investments in people, geographic expansion and products.  The roll out of Phadia’s full product suite and revamped marketing campaigns in the U.S. was accompanied by an expansion and optimization of the U.S. sales force from 40 outsourced representatives at acquisition to nearly 200 representatives at exit. As a result, U.S. sales grew at a 23% CAGR since 2007-2011.  Cinven’s Asia team developed a number of initiatives, including the acquisition of Phadia’s main distributor in China and a roll out of products in India.  In 2011, Cinven’s investment into product development led to the release of two new allergy and autoimmunity testing instruments. Capable of combining allergy and autoimmunity testing, these new allergology technologies delivered a throughput 4 to 5 times higher than any other combined instrument at the time. This was one of the many ways Cinven aided Phadia in meeting high volume clinical laboratories demand with shorter lead times and higher efficiency.

These initiatives successfully translated to building Phadia into a lucrative business and attractive target. During Cinven’s ownership, EBITDA increased by over 50% from €96m to €146m, despite operating in a recession. In a strategic move by a leading biotech product development company, Thermo Fisher acquired Phadia in 2011 – a testament to the significant value Cinven had helped create. The €2.47bn sale of the company resulted in a €1bn capital gain and 3.4x return for investors.

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