Over the last decades the Private Equity industry has developed into an important component of corporate finance. The objective of the following paper is to offer an overview, as exhaustive as possible, of the universe of Private Equity, trying to understand, through an empirical study, the real impact that Private Equity investments have on small and medium-sized enterprises subject to investment, within in the Italian market. The first chapter aims to frame the phenomenon of Private Equity, defining its characteristics and limits in detail, differentiating it from other similar forms of investment included in the Private Capital universe, such as Venture Capital and Private Debt. The chapter deals with various relevant aspects, such as the definition and sphere of influence, the governance and organizational mechanisms adopted, the relationships between the players involved in investment transactions and the main performance measures adopted are analyzed. The second chapter introduces and analyzes the different types of investments adopted by private equity operators and the various investment steps. The clusters examined include four types of investments, namely growth capital, buy-outs, turnaround, replacement, some of which will be studied in the final empirical analysis. As regards the steps that a Private Equity operator must go through to make an investment, there are three phases: Fundraising activity, which focuses on collecting the resources necessary to make the investments; Investing activity, which is the core process of the Private Equity business as it involves the decision making and deal making phases; Exiting activity, the phase in which the monetization of the value creation achieved during the investment period takes place.
The third chapter proposes a review of the past Italian and international literature, aimed at understanding whether the intervention of a private equity operator actually delivers a positive impact on the target companies and if this is not limited to the mere contribution of new financial resources but rather, to enable the company to enter a new phase of the life cycle, influenced and supported by the collaboration of a professional interlocutor. Finally, as a preparation for the final chapter, some past research is reported regarding the impact on the performance of these investments on the Italian SME market, which represents more than 90% of Italian companies. The fourth and final chapter contains an empirical study that aims to examine, with reference to the Italian SME market, the effects of Private Equity investments on the main economic-financial indicators (Revenues, EBITDA, Net Profit, Total Assets, Employment Rate) of the companies being invested. The achieved results are compared with some benchmarks, such as main macroeconomic indicators (national GDP and employment growth rate), the ISTAT database on Italian companies and the Mediobanca-Unioncamere research on Italian small and medium-sized industrial enterprises. At the end of the investigation, a study is carried out on the companies themselves, analyzing the financial statements before and after the investment date (with a three years’ time horizon). The objective of this last analysis, not frequently found in past literature, is to examine the change in the annual growth rates of the previously mentioned dimensional and income indicators, in order to understand if there is a significant impact on performance due to the investment, or whether such growth was already present before the operation took place. In the final conclusions, a summary view of the results obtained following the empirical research is proposed, comparing these outputs with past literature, with the aim of outlining the role that Private Equity assumes and its contribution to Italian medium-sized enterprises’ market.
The private equity market is an important source of funds for start-up firms, private middle-market firms, firms in financial distress, and public firms seeking buy-out financing. Over the past years it has been the fastest growing market for corporate finance, by an order of magnitude over other markets such as the public equity and bond ones and the market for private placement debt. Private equity is often confused with venture capital, as they both refer to firms that invest in companies and exit by selling their investments in equity financing. Considering the purely terminological front, the institutional investment activity in risk capital today takes on different connotations depending on whether one considers the most widespread practice in USA or in Europe, i.e., whether venture capital is considered distinct from private equity or as a sub-unit. In the United States, this form of intervention is divided into two autonomous categories, venture capital and private equity. The first includes all operations aimed at companies in the early stages of life or at a later stage of development, while the second concerns mature companies. The clear separation between the two investment categories not only reflects the life cycle of the company, but also includes distinctions relating to reputation, the process of selecting target companies, value creation and exit, characteristics that make them, according to many scholars, so different as to be irreconcilable. In Europe, however, venture capital activity is regarded as a part of private equity. According to Invest Europe (European association representing private equity and venture capital funds), formerly EVCA, private equity is defined as an entity that makes long-term investments in small, medium, and large companies with the aim of making them larger, stronger, and more profitable, while venture capital can be described as a private equity investment that focuses on start-ups.
In the wake of European practice, in Italy, AIFI has defined the private equity activity as “investment activity in the risk capital of unlisted companies, with the aim of enhancement of the investment company for the purpose of its disposal within the medium-long term”. Having defined the private equity activity, venture capital is part of it as a species within a genus. Venture capital does not therefore constitute a different activity distinct from private equity, but a particular private equity activity aimed at financing the company in the first phases of the life cycle, which are particularly delicate and “adventurous” (hence the definition of venture capital). In this regard, according to the moment in which the intervention of the operator occurs, the expressions seed, start-up and later stage financing are used. Considering these elements, in the continuation of the paper the characteristics of the private equity investment activity will be described and analyzed in detail, using the European terminological practice, and specifying, where possible, the different phases of intervention to which it refers. Similar to a mutual fund or hedge fund, a private equity fund is a pooled investment vehicle where the adviser pools together the money invested in the fund by all the investors and uses that money the make investments on behalf of the fund. The substantial majority of private equity investments, at an international level, is made through funds, whose legal structure is that of a limited partnership. This mechanism is based on an agreement between the so-called limited partners (investors) and the general partner (the manager of the fund). The general partner (GP) is unlimitedly liable to third parties, including personal assets, for the obligations of the limited partnership. The limited partners (LP) have the benefit of limiting their liability to the share of subscribed capital.
The main role of the private equity firm is to provide investment advice to the private equity fund, created in joint partnership with the investors. The firm which acts as a general partner of the fund, also executes investment decisions, oversees the fund’s investments, and receives fees for these services. The professionals of private equity firms often have a wide variety of skills and experience and, generally, investors view the element of diversity in the creation of the investment team as a positive one. To raise funds successfully, investment teams have to present a convincing and deliverable investment strategy, appropriate investment credentials, and, fundamentally, evidence of prior success in executing a similar investment strategy. Investors in private equity funds are the entities that provide capital to the fund. They provide the equity capital which is governed by strict legal rules (established in the limited partnership agreement) and task the GP with executing the prescribed investment strategy of the funds and delivering risk-adjusted returns. The LPs are effectively passive investors with no influence on the investment matters of the fund once it is established. By investing through a fund partnership rather than directly in the firms in which these funds buy stakes, the investors also gain access to highly skilled investment professionals with demonstrated abilities. Investors delegate to these professionals the responsibilities of selecting, structuring, managing and eventually liquidating the private equity investments. The private equity funds are established as a “blind pool” of capital. Consequently, once LPs commit their investment to the found, only the GPs have discretion on how to invest money and when to invest it or return it.
Most private equity funds are “closed-end” funds, as investors cannot withdraw their investment until the fund is terminated. In the last twenty years, private equity in Italy has undergone a significant expansion. Starting from the nineties, a very rapid growth has been observed, leading to the phenomenon of the “new economy”, creating a first peak, between 2000 and 2001, in the number of active operators (86 in 2001). In fact, at the turn of those years, the birth of many subjects specialized in the early-stage compartment was registered. Between 2005 and 2010 the market saw a progressive growth of active operators (reaching 129) and also a growth of the average size of managed capital, while following the contraction suffered by the market after the international financial crisis and the difficulties encountered in the collection of new waves, a progressive consolidation was observed which saw the exit from the market of some operators and, more specifically, the aggregation of various initiatives. Today the number of AIFI members has returned to rise and, in 2020, stands at 150, including both domestic and international private equity, venture capital, and private debt operators active in Italy. The evolution in the number of private equity transactions has undergone a growth since the early 2000s, and then stopped and decreased during both the first financial crisis of 2008 and the sovereign debt crisis in 2012, which involved several European countries. However, after those years, the market has undergone a strong and unstoppable development which led, in year 2020, to 253 operations recorded in Italy. Moreover, in 2021, the private equity market is at record levels and provides proof of consolidated maturity in a very complex historical phase, registering 160 new investments just in the first semester of the year, while in the same period of 2020, which in any case123 had already concluded with absolutely positive evidence, 103 investments were mapped.
To outline the current weight that the private equity industry has on the real economy, the following data emerges from the AIFI annual conference in 2021: the companies held in portfolio amount to 1.500 (considering both private equity and venture capital), for a total of 600.000 employees and about 200 billion euros of revenues. Regarding the European market, in 2020, investments in SMEs (with less than 250 employees) were about 85% in number of companies and 25% in amount invested. In 2019, those investments amounted to 84%, thus confirming a similar trend compared to Italian market (75% investments in SMEs).The objective of the paragraph is to illustrate the main characteristics of the various investment clusters, already mentioned in the previous chapter, that are involved in private equity transactions, in particular: growth capital, buy-outs, replacement financing and turnaround. Growth Capital, also known as Expansion Capital or Growth Equity, is a type of private equity investment (often a minority investment) in relatively mature companies that are looking for primary capital to expand and improve operations or enter new markets to accelerate the growth of the business. In general, growth capital includes all risk capital invested in already existing and established companies used to incentivize development, dimensional growth, and potential quotation in a public financial market.
This type of participation is less risky than those concerning the initial and start-up phase of a company because there is an already tested and well-functioning company with a significant base of customers. Replacement financing, the typical support from private equity finance for firms in their mature age, funds companies looking for strategic decisions associated with the governance system and the firm’s status, rather than the firm’s approach to finance. Replacement financing is never used to boost sales growth or to realize investment in plants. Instead, it is used for strategic or acquisition processes. Replacement capital is the proper solution to fund spin-off projects, equity restructuring, shareholder substitution, IPOs, family buy-in or family buy-out, etc. Buy-outs are defined as private equity interventions that are carried out in order to support the change in the ownership structure of the company involved in the transaction, and therefore where a real transfer of control occurs. Buy-out operations are therefore characterized by the fact that, within the investment, a change in the controlling structure occurs, which is normally acquired by the private equity operator (or by a group of operators), with all the consequences and responsibilities that this124 position entails.
It is for this reason that these operations differ substantially from those of growth capital seen previously, which mainly referred to the purchase of minority stakes by private equity investors, and certainly also with respect to those of venture capital and early-stage financing. It is not a “partnership” with the entrepreneur, although this may in some cases happen. Finally, we can define turnaround investing as the investment in a difficult economic and/or financial situation, with the prospect of relaunching it, in order to make a capital gain on the initial investment. This is true both for privately held companies and for listed companies: in both cases it is a question of identifying a firm that has an intrinsic value and a potential capable of achieving better results than the current ones, thanks to certain characteristic (such as market positioning, management, and brand). The fundraising activity is fundamental within the managerial process regardless the legal status of the deal, the organizational structure of subjects involved, and the characteristics of firms or projects selected later. The first step of the fundraising activity consists in the creation of the business idea. It starts by explaining the idea to the business community and catch the attention of potential investors. Business idea creation is aimed at producing an information memorandum to be promoted in the market. Before that, a preliminary phase, often called “taste of waters” occur.
This is carried on in a very informal way among the professional network, with the aim to assess, for instance, whether it makes sense for the private equity investors to invest in a specific private equity cluster or not. We can identify the second step of fundraising activity with the name “Job Selling”, in which it is crucial to identify the category of investors potentially interested in a fund. The fundraising strategy is profoundly influenced if the fund is new, or if it represents the continuation of a previous initiative; the absence of a track record and the necessity to develop a network of contacts makes the fundraising complex and laborious. Investing is the core of private equity business and the way to develop a business idea for the investor. There are two main initial steps in the investing activity: Decision Making: valuation and selection of opportunities and matching them with the appropriate investment vehicle. Target company valuation, the “core performance” of a private equity fund, is a proper blend of strategic analysis (about the business, the market, and the competitive advantage), business planning, financial forecasting, human resources, and entrepreneur and management team assessment. Deal Making: activity of negotiation of the contracts by which the private equity firm can invest and actively participate in the company. These contracts include, for instance, the calculation of the shares the investor has to buy and the corporate governance rules. Once the two initial phases of the investment process are concluded and the investment agreement has been reached, a fundamental aspect of the investment phase concerns its monitoring and valorization.
In order to increase the value of target companies, private equity exploits different strategies in order to get the highest value possible when exiting their investment. Strategies should be considered with the positioning of the fund declared in the fundraising phase. Through divestment, the creation of value becomes from theoretical to effective, transforming the portfolio valuation into a price and consequently into a yield obtained on the market. For this reason, from the first analysis of the potential investment, private equity operators question themselves in advance about the exit possibilities and the most likely categories of potential acquirers at the time of divestment, despite being very distant in time. During the investment cycle, the prospect of exit cannot be neglected, in particular when the company must evaluate a transformational acquisition that could positively or negatively affect the success or the exit. Think of how profitable it is, for thepurposes of a subsequent valorization, to have increased the scale of the company and its degree of internationalization through a build-up strategy and have placed it in a range of higher multiples. Among the several main strategies for divestment we find: the sale to a strategic buyer, the sale to a financial buyer, Buy-Back, IPOs, Write Offs. The intervention of an institutional investor in the risk capital of a company is not limited to the contribution of new resources but may enable the company to enter into a new phase of its life cycle, influenced and supported by the collaboration with a professional interlocutor.
The issue of the role of investors, who are not only “capital providers”, but real active owners who, working in support of the board and management of the company, contribute to the implementation of growth and value creation strategies, emerges centrally. As proof of the validity of this type of attitude, several studies have shown how investor activism can contribute to achieve higher performance than the market or the reference benchmark. The areas which, according to the market practice and sector literature, are typically subject of intervention by private capital operators will be dealt with in detail below:
- Contribution of professional contacts and sounding board effect for the entrepreneurial idea.
- Support for the review of managerial processes and strategic framework.
- Support for internationalization, external growth, and creation of new business areas. Financial advice and services. Focus and investment in innovation, research, and development for greater production competitiveness. Support to the entrepreneur in dealing with managerial processes and possible generational transitions.
- Promotion of ESG practices. Over the last few years, numerous research have been carried out having as objective the analysis of the contribution of private equity and venture capital operations to economic growth. Most of these studies are summarized in a document produced in 2013 by Frontier Economics for EVCA (European Venture Capital Association), which focuses on the impact of operations in terms of innovation, productivity, and internationalization. First of all, private equity is able to increase innovation, not just by providing capital for research and development, but also, for example, helping the company to focus on its own strengths. Typically, this impact is measured by the number of patents. The relationship between patents and economic growth is not clear cut, and patent regimes are not a primary determinant of growth. In addition to support for innovation, further research show how private equity contributes to making portfolio companies more productive, supporting aggregate economic growth. Among the interventions that can be implemented by private equity investors we find, for example, strategic and managerial improvements, economies of scale, employee incentives, which lead to time saving and to a greater ability to exploit business opportunities. The third field of analysis on the economic impact of private equity is related to the benefits in terms of competitiveness and internationalization: in particular, numerous studies demonstrate the contribution to the processes of internationalization, often very difficult for smaller or younger companies. After combining a review of the studies carried out in recent years at an international level, we can observe that most of them have found a decidedly positive impact of private equity on target companies, supporting them by increasing the level of innovation, productivity, internationalization, and competitiveness.
However, in some cases there is also evidence of a non-positive impact on the performance of the companies in the period immediately following the investment. The Italian market mainly relies on small and medium-sized enterprises (SMEs). To better understand the weight of SMEs within the Italian economic and production framework, it is good to linger on the numbers. Out of 4,4 million active enterprises in Italy, micro-enterprises with fewer than 10 employees are numerically the most important ones, representing 95,05% of the total, against 0,09% of large enterprises. On the other hand, Italian SMEs are about 206 thousand, i.e., the remaining 4,86% of the Italian entrepreneurial market, and are responsible, alone, for 41% of the entire turnover generated in Italy, for 33% of the total number of employees in the private sector and 38% of the country’s added value. SMEs have all the credentials to be able to give impetus to the Italian economic (and territorial) development, also thanks to the increasing support provided by private equity investors. Making a comparison with the Italian scenario, based on the parameters analyzed in the previous paragraph, we note how the impact of private equity on Italian companies is mostly positive. A recent study called “The economic impact of Private Equity and Venture Capital in Italy”, carried out by PwC (PricewaterhouseCoopers) in March 2018, shows that companies owned by private equity or venture capital funds have performed better than other Italian companies in terms of revenues from sales and services, EBITDA, and employment. This research took into account a sample of 499 disinvestments, of which 218 of venture capital (also including growth capital) and 281 of buy-out, carried out in Italy from 2008 to 2018.
The analysis revealed that the companies owned by private equity and venture capital funds were characterized by an annual growth in revenues of 5,5%, about four times more than the Italian companies taken as benchmarks (1,3%). This growth rate was significantly higher than the growth of the Italian gross domestic product, which stood at around 0,7%. As regards the employment rate, unlike the positive but stationary 0,0% recorded in the reference sample, the companies in which private equity operators have an interest recorded an annual increase of 5,1%. A study conducted by the LIUC University in January 2014 called “The economic impact of private equity in made in Italy”, examines the private equity transactions carried out in Italy from 2007 to 2012 (excluding investments made by public operators, those addressed to start-ups and secondary buy-outs). Analyzing the data of the companies active in the Made in Italy sectors, from the research it emerged that between 2008 and 2010 the companies in which private equity holdings registered a growth in turnover equal to 4,3%, while the ISTAT data relating to the same period and the same sectors show a decrease of 5,1%. Even compared to GDP, which recorded a decrease of 1,9% between 2008 and 2010, the performance of companies held by private equity funds are certainly very positive. Similar results characterize the level of employment: the study, in fact, shows a positive trend with a CAGR of +4,1% for the companies subject to investment, which exceeded the reference benchmark, characterized by -4,0%. It is also worth mentioning, although not so recent, a similar investigation conducted in 2008 by Francesco Bollazzi, professor at LIUC University. The study aims to analyze the economic impact generated by institutional venture capital investors in development finance operations (growth capital) targeting a family business, in the interval between the year of entry and the year of exit of the shareholding structure.
According to the study, the presence of negative changes was recorded for 39% of the companies belonging to the sample, while the remaining 61% maintained a positive trend during the investment period. Among others, 18% of the sample shows an average annual growth even higher than 90%. The empirical analysis aims at understanding if and how the institutional investor has generated value and identify its real contribution to the development path of the investee company. It is conducted on private equity transactions carried out in Italy from 2013 to 2016. The transactions are identified in the annual reports published by the Private Equity Monitor (PEM), which takes into consideration only “the new investments made by institutional investors in private capital risk, in all phases subsequent to those of business start-up, thus excluding investments made by public or para-public operators, venture capital operations and reinvestments in companies owned by the same operator, the so-called follow-on”. With reference to each company in the sample, a series of information and indicators were acquired which made it possible to carry out an analysis on two levels: qualitative, framing the phenomenon in question at a temporal, geographical and sectorial level; quantitative, through budget, financial, performance and employment indicators. More specifically, to study the economic impact of private equity on target SMEs, income indicators (EBITDA and Net Profit) and dimensional indicators (Revenues, Employees and Total Assets) will be examined. The data of the companies were obtained through the AIDA – Bureau Van Dijk database, containing the financial statements, personal and product data of all active and bankrupt Italian joint stock companies (excluding Banks, Insurance Companies and Public Entities).
The results of the study will then be129 expressed in terms of CAGR (Compound Annual Growth Rate), which measures the annual growth of a particular indicator over a specific period of time. First of all, the analysis will focus on to comparison with some reference benchmarks, to understand if and to what extent the results provided by the sample differ from the results recorded for companies that are not owned by private equity funds. In particular, the benchmarks taken into consideration are three: Macroeconomic indicators (such as national GDP and Employment Rate), Mediobanca-Unioncamere research, which presents the annual results of Italian industrial SMEs between 2008 and 2018, and data provided by ISTAT (National Statistical Institute) which provides the economic annual results of Italian companies. subsequently, the data collected will be used to carry out several analyses on the sample, including a comparison of targets’ performance in the three years before and after the investment, in order to have a complete picture of the type and extent of the impact provided by private equity operators. In this way it will also be possible to understand if this impact is significant or if similar growth rates were recorded even before the investment, therefore attributing to the operator the ability to select specific companies that record higher returns and growth rates than others, in order not to modify the previous trends of acquired companies and helping to maintain or even accelerate the performance of already growing companies. First of all, as already mentioned, it was decided to consider, through the PEM database, all the investments (not necessarily already divested) made between 2013 and 2016, in order to be able to collect all the necessary financial statements available on the AIDA database before and after the investment date. The former sample is composed by 360 companies (69% buy-out, 25% growth capital, 4% turnaround and 2% replacement).
For obvious statistical reasons, the analysis will mainly focus on buy-outs and growth capital transactions, thus not considering the other typologies. Furthermore, for some of the transactions covered by the experiment, it was not possible to retrieve the data on the financial statements from the AIDA database because of their absence or incompleteness. After necessarily excluding also large companies and secondary buy outs, the total number of companies in the sample amounts to 107. From a sectorial point of view, 33,6% of the small and medium-sized enterprises in the sample operate in the industrial products sector. Following this, with a percentage equal to 21,5% of the total, are the companies belonging to the consumer goods sector, while the third most invested sector is that relating to food and beverage with a percentage of 15,9%. Another important and deserving aspect of further study is the one relating to the amount of share capital through which the investor enters the shareholding structure of the target company. In particular, 7,5% of the sample acquired shares not exceeding 25%, 21,5% shares between 26% and 50%, 31,8% shares between 51% and 75%, lastly 39,3% shares ranging between 76% and 100%. Consistently with the types of transactions taken into consideration, i.e., buy-outs and growth capital, most operations are characterized by the acquisition of a majority stake by the private equity investor. The first analysis carried out on the sample concerns the involvement of two macroeconomic indicators, namely the Italian GDP and employment rate. To make a comparison between the trends of small and medium-sized enterprises invested by private equity operators, it was decided to take into consideration the average CAGR in the 2016-2019 four-years’ time horizon (i.e., exactly the following three years compared to the investment date).
Over the period, private equity-owned companies have continuously grown at a higher pace compared to the Italian market, both in terms of revenues and employment growth rate. In the following chart the comparison between GDP’s CAGR and PE backed companies’ revenues and EBITDA is displayed. The second macroeconomic indicator used as a benchmark for the sample refers to the employment rate. The employment growth rate trend in Italy has shown a quite flat trend over the reference period, however highlighting a slight decrease ending in 2019 (about -0,4%). Over the same period, Private Equity backed SMEs have always kept a higher employment growth rate, constantly about 7% above the national rate. The second benchmark to be analyzed is constituted by ISTAT data on the annual economic results of all Italian companies, hence including the ones not participated by a private equity fund. Considering only small and medium-sized enterprises, up to a maximum of 250 employees, the ISTAT data show an annual negative turnover growth rate in the three-years’ time horizon, with a value of approximately -1%, while the companies owned by private equity shows, in the three years following the investment, a positive turnover growth rate, much higher than the reference benchmark, for a total difference of 9,87 percentage points.
In terms of EBITDA, the average CAGR of the sample amounts to 11,8%, while the reference benchmark, pointed out by ISTAT in a three-years’ time horizon is about 2,8%. Also, in this case the PE backed firms have a much higher growth rate than the national average for small and medium-sized enterprises, with a difference of about 9 percentage points. The last comparison worth exploring using the data provided by ISTAT is that of the growth in the employment rate. In this case, companies invested by private equity operators, which have an average employment rate’s CAGR of 9,1%, exceed the benchmark provided by ISTAT by almost 8 percentage points. After comparing the data contained in the sample with those provided by the ISTAT databases, it was deemed necessary, in order to confirm these trends, to compare the sample also with further research. For this reason, the research carried out by Mediobanca and Unioncamere will be used, which analyzes Italian small and medium-sized industrial enterprises, for the period that goes from 2009 to 2018 (the period taken into account will be a three years’ time horizon, similarly to the sample).
Differently from the data found by ISTAT, which however also includes small and micro enterprises, the average annual growth of revenues measured by the benchmark is positive, but in any case, much lower than the CAGR recorded in the private equity backed companies analyzed. The difference, however, remains almost similar to that found by comparisons with other benchmarks. If we take into consideration the data on the growth of the employment rate we see that the CAGR detected by the benchmark is significantly lower (0,23%) for the analyzed years, the sample instead returns an employee growth rate of 9,1%, also in this case the data collected by ISTAT and Mediobanca- Unioncamere are very close to each other, and the difference with the sample is almost the same and is around 9-10 percentage points. Finally, the last indicator to be analyzed is that of total assets growth rate. In this case, the growth of total assets in companies owned by private equity operators (in the three years following the investment) is on average much higher (14,99%) than the growth of total assets recorded in Italian medium-sized industrial companies (1,05%), with a difference of approximately 14 percentage points. After carrying out an analysis by comparing the average data collected in the sample with those observed in the reference benchmarks, it was deemed appropriate to investigate the impact of private equity on the target companies themselves, comparing the performance trends before and after theinvestment (taking into consideration the three previous and three subsequent years).
The main objective of this last step is to actually ascertain whether, as stated by some research in the literature, private equity has a significant and clearly visible impact compared to the pre-investment period, or whether private equity companies only select firms that already have high growth rates, helping only to accelerate or maintain the performance of companies that are already growing. Overall we can observe that there is no significant difference between the pre- and post-investment averages. The only exception is constituted by the average employment three-years CAGR, which, being subjected to the T-Test, reported a significant difference for p < 0.05. In conclusion, we can say that, on average, the compound annual growth of target firms after the investment is slightly higher than in the previous period. However, these differences are not overwhelming, except for the rate of employment growth which is significantly higher in the subsequent period.From the empirical research proposed in chapter four, several conclusions can be drawn. First of all,it is important to underline how by comparing the data on Italian SMEs subject to private equityinvestment with the benchmarks illustrated in the introduction phase, the skills and resourcesprovided to the target companies favor a much higher growth of the invested company compared tothe average recorded by the macroeconomic indicators, ISTAT and Mediobanca-Unioncameredatabases. In fact, as supported by provided data, companies that are subject to private equityinvestments have significantly higher CAGR in size and performance than non-investee companies.
As we noted in the final part of the analysis, taking into consideration the total averages, we observean improvement in growth rates in the period following the investment for all indicators except forthe Total Assets’ CAGR, for which post-investment growth is slightly lower than pre-investmentgrowth. However, the gap recorded in the two periods is not particularly significant, in fact the biggestdifferences are recorded in the employment growth rate, around 3%, and in the EBITDA growth rate,around 4%. This suggests that private equity firms, on average, excluding turnaround operations,usually target small and medium-sized enterprises that already have rather high growth rates, or atleast fairly above average. The only exception in which the difference between the growth rates isstatistically significant is that concerning the employment rate, which is significantly higher in theperiod following the investment by a private equity fund.At the end of the proposed research, it is possible to affirm that, in general, the entry of a privateequity fund into the share capital of a target enterprise positively influences the economic andfinancial performance of the investee company. This emerged both when the theoretical part wastreated, and also when the empirical analysis was performed in the fourth chapter. In fact, for thecompany, the entry of a fund represents not only a contribution of capital but also a contribution ofskills, of know-how transfer, of help in management, of exploitation of the network of contacts thatthe fund has.
The relationship that is formed between investor and company is undoubtedly to beconsidered win-win, since the fund actively strives to ensure that the investee company increases itsvalue. The more this value increases, the more the capital invested by the fund will be remunerated.Observing the studies carried out in the document produced by Frontier Economics in 2013, we cansee how, at an international level, most of the research attributes to private equity firms a decidedlypositive impact on target companies, supporting them by increasing the level of innovation, ofproductivity, internationalization, and expertise. Also in Italy, from the research analyzed, it isbelieved that private equity represents, for Italian companies, an option to be taken into consideration;also, in the light of an entrepreneurial system characterized for the most part by small and medium-sized enterprises, undercapitalized, family-owned, poorly managed and grappling with the challenges deriving from globalization. As regards the first objective set by the empirical analysis, the results obtained are definitely positive and confirm what has been observed in the literature. The analysis was carried out on a sample of 107 small and medium-sized Italian companies invested between 2013 and 2016.
By examining the annual growth rates in the three years following the investment, we note that the vast majority of companies in the sample present a clearly positive CAGR for all the indicators analyzed (Revenues, EBITDA, Net Profit, Total Assets, Employment rate). On the other hand, with the exception of Net Profit, the number of companies whose indicators show a negative CAGR in the three years following the investment are negligible. After having outlined and analyzed the sample in detail, the data were compared with three benchmarks, in order to seek a comparison with a sample of companies not involved in private equity investments. The adopted benchmarks were: two main macroeconomic indicators, hence Italian GDP and Employment growth rates; the ISTAT database, which collects data on all Italian companies broken down by number of employees between 2015 and 2018; the Mediobanca-Unioncamere database, which collects data on all Italian small and medium-sized industrial enterprises between 2008 and 2019. The analysis showed that the growth rates of small and medium-sized enterprises subject to investments are much higher than those provided by the reference benchmarks containing non-investee companies. At first sight, therefore, it would seem that the collaboration between the private equity investor and the small-medium enterprise has had an extremely positive impact in the growth process of the target. For this reason, in the second part of the analysis, it was decided to compare the data from the three financial statements before and after the investment of the companies observed in the sample. The results of this analysis show how, following the investment, the growth rates of the analyzed indicators are on average higher than those recorded in the pre-investment period. However, the differences between the periods before and after the entry into the share capital by the private equity operator are not overwhelming, on the contrary, the percentages, on average, are very close to each other, with the only exception of employment growth rate which results significantly higher in the period subsequent to the investment. Therefore, the conclusion deriving from this analysis, while confirming the positive role of private equity as a support for the creation of value for the company, which goes beyond the mere contribution of financial resources, also confirms the widespread opinion according to which private equity does not significantly change the previous trends of acquired companies, but rather helps to maintain or even accelerate the performance of companies that already have high and constant growth rates.
Giuseppe Incarnato – Chairman & CEO IGI INVESTIMENTI GROUP
