UK report shows portfolio growth amid recession

Despite the economic downturn, companies owned by private equity firms have been more productive than their non-PE-backed counterparts in the UK, according to a recent report by the British Venture Capital Association (BVCA).

The survey, done in association with Ernst & Young, examined the most recent fiscal year-end performance of the largest UK portfolios that met the Walker report disclosure and transparency guidelines outlined in 2007. Among the 47 companies – acquired for an aggregate £82 billion – that took part were Apax-backed Emap and Travelex, Montague Private Equity-owned Biffa and Irish power supplier Viridian, which was acquired by Arcapita in 2006.

The results showed that annual productivity growth at these portfolios was 7.7 percent, significantly higher than the growth rate of 1 percent for the UK economy as a whole during the same timeframe. Average annual profit growth also increased 11 percent, while tangible fixed assets grew by £8.6 billion to a total of £41 billion.

With the surveyed companies reporting their financial year-ends for either December 2008 or March 2009, the report gives an idea of how they weathered the early part of the recession. Next year’s report however should demonstrate more thoroughly whether such growth was able to be maintained.

While calling the results “promising”, BVCA chairman Simon Walker stressed that they should be interpreted with caution. “While the profit and productivity growth figures are testament to private equity’s focus on portfolio management through the recession, the economic outlook remains uncertain,” he said in statement. “Private equity-owned companies are not immune from continuing recessionary pressures. Managing companies through the downturn and investing in them in preparation for the upturn when it arrives will continue to be the priority for private equity firms.”

That may be harder following the release of the pre-Budget report by UK Chancellor of Exchequer Alistair Darling, which calls for an .5 percent increase in national insurance contributions for all employers, employees and self-employed parties starting in 2011, as well as a .5 percent rise in income tax for those making £44,000 or more. Amid the positive findings in the BVCA report, it also showed that total costs per employee for UK portfolio companies grew by an average annual rate of 2.2 percent in the past fiscal year.

“It is astonishing that the Chancellor has chosen to impose a tax on job creation at a time when economic recovery is the priority,” Walker said. “The increase in national insurance contributions will serve to erode further the UK’s competitiveness and slow economic recovery. The top level of personal income tax in the UK will now effectively be 52 percent. This must be a continuing disincentive to living and working in Britain. It continues the erosion of London as a global financial centre.”

Walker’s warnings echo similar predictions he made last year about the effect that the government’s proposed tax increases would have in forcing investors to move to more favourable jurisdictions like Switzerland and Guernsey. Since then the UK has in fact seen an exodus of dozens of hedge fund and private equity managers such as Terra Firma’s Guy Hands, while London mayor Boris Johnson in October joined the chorus of those warning that the city’s position as a top financial centre is at risk.