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. Looking then at productivity, it emerges that Italian SMEs are doing well: they generate an added value well above the 48 thousand euros per employee of the European average. The same cannot be said for large and micro enterprises, where the Italian scenario is far from the European average values. For all these reasons, therefore, 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. From a study provided by AIFI in 2020, regarding ESG parameters related to private capital activity in Italy, it emerges that the average annual growth in the number of employees is elevated in buy-out (+111%) and replacement operations (+54%), while it is lower in growth capital operations (+11%) and negative in turnaround interventions (-9%).
However, the average number of employees has increased overall by 89%. Referring, instead, to innovation supported by private equity companies, a study carried out by the LIUC university in collaboration with AIFI, with the aim of analyzing the ability to induce innovation by measuring the filing of new patents and trademarks, shows how the patenting activity of private equity-backed firms, in the sample taken into consideration, is higher than the Italian average (27% against 5% of the reference benchmark). In absolute terms, it is the targets of the buy-out operations that file the most patents. The companies that show a greater propensity for innovation are concentrated in the manufacturing and large-scale distribution sectors. Moreover, according to the study, the majority of companies that file post-investment patents are those that have patented even before the investment. In relative terms, growth capital operations are those that file the most patents (24% compared to 18% of buy-out operations). Finally, to analyze the impact of private equity on the support related to the internationalization of companies, reference is made to a study conducted by the LIUC university, again in collaboration with AIFI, which studies a sample consisting of 833 growth capital and buy-out operations, carried out between 2006 and 2015 in Italian companies. The research states that in 82% of transactions, private equity contributed to improving internationalization processes. Among the companies not yet internationalized, during the holding period 45% of them decided to enter foreign markets. The preferred internationalization strategies are the opening of an office abroad, the search and contracting of agents or distributors and M&A. In 82% of cases, the targets increased the weight of foreign turnover during the holding period, mainly using the opening of an office abroad as a strategy.
Instead, the companies that have carried out M&A activities (mainly SMEs operating in the industrial and consumer goods sectors) have carried out on average almost two transactions each, favoring the acquisition of competitors.79 The benefits brought by the private equity-target operator partnership on the Italian market also clearly emerge from a study conducted by the Bank of Italy and AIFI in 2009, carried out by collecting information relating to 57 transactions. The results indicate that the operators provided support mainly on financial aspects and on the definition of strategies. They also played a “certification” role, facilitating the collection of funds from other lenders and improving relations with banks. On the contrary, the contribution in terms of technical product development, human resource management, marketing policies and improved access to suppliers and distributors is reduced. To further explore the impact that private equity funds have on the performance of target companies, it is necessary to mention some research carried out in the past years. 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. Within the study, the performances are indicated through the average of the CAGRs (compound annual growth rate) recorded by each company included in the sample and then compared with the reference benchmark.
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%. In detail, analyzing the venture capital operations, data shows that the companies involved in the investment were characterized by a growth rate of revenues equal to 8,2%, against 1,4% of the reference sample.
Similarly, the growth in terms of EBITDA was 14,8%, compared to -0,8% of the benchmark. Even taking into consideration the data of the same study, however, referring only to buy-out operations, the values are positive. In fact, the annual growth in revenues of the companies invested by private equity operators was 3,4%, against 1,3% of the reference benchmark. The most significant data concerns the annual growth of the EBITDA of the companies under study, which stood at 3,4%, compared to -0,7% of the benchmark. 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).
As regards the sectoral analyzes, the ISTAT data were analyzed referring only to the product categories that make up the 4 sectors of Made in Italy: food, clothing, mechanical-automation, furniture-design. In order to study the economic impact of private equity on the target companies operating in the Made in Italy, the most general economic parameters were analyzed, but indicative of the management and performance of the companies, i.e., the revenues from sales and services and the employment level of the companies. company, understood as the number of employees per year. The results were compared with those recorded by ISTAT in the same period in the same time period for all Italian companies. 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 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. The database of operations used as a sample (33 operations in total) of the research consists of operations in which the investor’s entry year does not exceed 2004. This situation is a direct consequence of the average medium-long time horizon typical of private equity investments. Furthermore, the sample shows that more than 50% of the operations were carried out between 2000 and 2001. In order to fully understand the economic impact attributable to the private equity company, it was decided, as previously specified, to consider only operations whose intervention cycle had ended, that is, which had already been divested. A series of indicators considered significant were then chosen and the changes that occurred during the observation period were assessed. Similar to the research cited above, the parameters chosen to carry out the aforementioned analysis are revenues, EBIT, EBITDA, net profit, and some significant indicators from an equity point of view, such as working capital, net fixed assets, and shareholders’ equity. These changes were not determined as mere percentage changes, but in the form of CAGR. With the support of a private equity operator, as far as turnover is concerned, the research shows a significant impact in terms of growth, in fact only 18% of the companies belonging to the sample recorded a negative CAGR during the period of stay of the operator.
Most of the company recorded positive performances between 0% and 10%, reaching companies that have achieved growth of over 90% (12% of the sample). A similar study was conducted with reference to EBITDA. 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%. Finally, focusing on net profit, the research shows an average positive change of 14,78%. However, it is noted that 45% of the companies belonging to the sample obtained negative variations with reference to the net result and 24% of the sample recorded absolute negative net results. The conclusions of the research affirm that the collaboration between the private equity investor and the family businesses has clearly had an extremely psychological impact on the growth process of the target companies. This evidence assumes an even more significant value if it is reflected that most of the reference years have certainly not been years of marked economic development, at least in Italy. The empirical analysis of the study, however, allows to highlight very different outcomes associated with the operations. If more than 60% of companies show undoubtedly successful performances, there is, at the same time, the presence of a group of companies with reference to which there are no positive results in terms of development. This figure, identifiable with 39% of companies that contract their EBITDA, while presenting positive CAGRs relating to certain indicators, clearly shows some critical issues, precisely in the face of a decline in EBITDA, a key parameter for identifying value creation. It is therefore important to underline how criticalities may also exist within the relationship between private equity and family businesses, without forgetting the positive evidence.
To conclude the chapter, we noted how, both international research and those concerning Italian targetfirms, in different periods, have shown that private equity investment has a mostly positive impact inqualitative and quantitative terms on the performance of target companies. However, in some caseswe have seen scenarios in which the changes in the operational indicators of the target companieswere definitely negative ones.As we have seen in the previous chapters, among the many characteristics that represent Italy,certainly one of the most significant is the massive presence of small and medium-sized enterprises(SMEs), whose contribution does not extend only to the economic aspect, but also occupies an important place in the Italian cultural and social life. The objective of this chapter is to understand the impact of private equity investments on the main economic-financial indicators of the companies subject to investment, in order to understand if the benefits that the literature highlights are also attributable to the sphere of Italian small and medium- sized enterprises. After a methodological introduction, which describes the method of analysis and the adopted sources, the main characteristics of the sample under examination will be presented, after which the results of the research conducted will be explained. Finally, after comparing these results with the relative benchmarks, a similar analysis will be conducted on the companies’ performance itself, before and after the investment year. 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”.83 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 be expressed in terms of CAGR (Compound Annual Growth Rate), which measures the annual growth of a particular indicator over a specific period of time. In this regard, the three annual financial statements before and after the date of the investment will be taken into consideration. Normally a private equity investment has an average duration of 5/10 years, for this reason it is believed that considering the economic-financial indicators in the three years following the investment is sufficient to understand the impact of the investment itself.
The choice of the four years to be analyzed is also guided by the limits of the aforementioned database, which does not allow to access data prior to 2010. First of all, the analysis will focus on to comparison with several 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. For a better overview of the phenomenon investigated below, a description of the morphology of the sample identified is mandatory. 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 this first screening, the sample amounts to 152 companies. Since the objective of the paper is to analyze the performance of small and medium-sized enterprises, the second exclusion to be made is that of large companies. Companies that “employ more than 250 people, have a turnover of more than 50 million euros and have an annual balance sheet total of more than 43 million euros” were therefore excluded. In addition to this, it was also considered appropriate to exclude transactions characterized by a secondary buy-out deal, referring to “transactions involving the sale of a portfolio company by one financial sponsor or private equity firm to another85”. The main reason is that, since the control of the company is already in the hand of a private equity or venture capital investor, it is not possible to analyze the impact due to the intervention of an investor who acquires the company, or part of it, from a private owner. After necessarily excluding these two types of elements, the total number of companies decreased to 107, representing the complete sample that will be analyzed during the chapter. The graph below shows the number of transactions analyzed for each of the years taken into consideration. The number of investments in the sample is fairly homogeneous for each year, and slightly growing, resuming the trend of constant annual growth of total private equity investments at Italian level. Analyzing the sample from a sectorial point of view, in graph 22, it is shown how the investments under analysis are broken down, adopting the Standard Industrial Classification which is the reference sector classification in the international context.
Giuseppe Incarnato – Chairman & CEO IGI INVESTIMENTI GROUP
