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. As mentioned above, the second macroeconomic indicator used as a benchmark for the sample refers to the employment rate. The following graph shows the different trends between the employment’s average CAGR of PE-backed firms and Italian employment rates. 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. The database in question takes into account the performance and indicators of all Italian companies, for this reason it was necessary to filter these data by class of employees, taking into consideration only companies with a number of employees not exceeding 250, in order to include only SMEs.
The period taken into consideration by this database goes from 2015 to 2018, hence the CAGRs on the various indicators used as benchmarks were calculated over a three-years’ period, coinciding with the same time horizon as the analyzed sample. 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%. This trend is quite similar to the one observed. Also, in this case the PE backed firms have a much higher PE Sample ISTAT (2015 – 2018)100 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. As we can see, the trend perfectly mirrors that of Charts 28 and 29, in fact the 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.
Also in this case, the average CAGRs for each available indicator will be taken into consideration. The data that the Mediobanca-Unioncamere research makes available are the annual averages, from 2009 to 2018, of the revenues, employment rate and total assets of Italian medium-sized industrial companies (turnover not exceeding 50 million euros), for a total of about 3,400 companies analyzed. To ensure homogeneity between the sample and the analyzed benchmark, it was decided to adapt the time horizon of data provided by Mediobanca-Unioncamere. For this reason, the period taken into consideration will be the one that goes from 2015 to 2018 (latest available data), therefore taking into account, also in this case, a time horizon for growth rates equal to three years. As performed for the ISTAT data, the growth rates (3-Years CAGR) of these three available indicators, between 2015 and 2018, were compared with the average CAGRs detected by 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, as shown 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. As noted by the revision of the literature in chapter three, the impact of a private equity investment on target firms is significant and clearly visible.
In this chapter, from an analysis conducted on 107 SMEs, identifying macroeconomic indicators, ISTAT data and the research carried out by Mediobanca-Unioncamere as the main benchmarks, the performance of companies invested by a private equity operator is much higher both for as regards the growth of both dimensional and income indicators. It is therefore necessary to keep in mind the reflection carried out in the initial stage, where it was pointed out that the collaboration between institutional investor in venture capital and small and medium-sized enterprises has clearly had an extremely positive impact on the growth process of investee companies. This empirical evidence confirms what was stated in the introduction, namely that private equity contributes to the growth of target companies through financial support, but also thanks to a qualitative contribution that allows them to expand the horizons of the companies themselves. However, this is not always the case. 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 the investment (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 literature86, 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.
To do this, the data relating to the three years preceding the investment were collected following the same methodology and the same principle as the post-investment data collection. the graphs that will be proposed will analyze, for each indicator considered, the annual growth (in the form of CAGR) of the following three years and of the three years preceding the investment year (respectively t + 3 and t + 1). In addition to this, the total averages of the years considered will be also indicated in the charts. Before proceeding with the above-mentioned analysis, it was decided to carry out comparisons within the sample using relevant sub-samples, in order to understand if, differentiating for certain investment criteria, the performance after the investment changed significantly. For this purpose, three criteria were used to divide the sub samples: dimensional criteria, separating target firms that have more than 50 employees (however less than 250) and companies that have less than 50 employees (thus dividing between medium companies and small and micro companies); investment type criteria, separating buy-outs investments from growth capital investments; acquisition stake criteria, separating majority form minority investments. In addition, both one-tail and two-tail T-test were applied to the following sub-sample. The T-test is a parametric statistical test with the objective of verifying whether the mean value deviates significantly from a certain reference value. In this context, the T-test is used to evaluate the comparison between two average values. To determine whether the differences between averages are significant and not related to chance, first we have to look to the column Sig. (significance), if this value is less than or equal to 0,05, we need to consider the value of t associated with the “Do not assume equal variances” row.
On the other hand, if Sig. is higher than 0,05, we need to consider the “Assume equal variances row”. Furthermore, we have to consider the Sig. (one-tail) and Sig. (two-tails) values to assess whether there are significant differences. If those values are less than or equal to 0,05, the average values are considered significantly different. As we can observe, in terms of averages, the differences between the two sub-samples are subtle. Overall, considering the sample target firms, data shows that small and micro companies record a slightly better performance for almost all indicators, in the three years subsequent to the investment. The applied T-Tests state that there is not significant difference between the average CAGR of the two sub-samples. The tests therefore affirm that the hypothesis according to which there is no significant difference between the averages of the performances of medium and small enterprises cannot be rejected. The next table shows a similar analysis conducted considering buy-outs and growth capital investments as sub-samples. Also, data reported in table 8, do not identify a significant difference between the indicators calculated on buy-out and growth capital investments, although slightly better average results are recorded by buy-out operations.
The result obtained from the T-tests, in table 8, therefore states that there are no significant differences, in terms of performance growth, between a buy-out investment and a growth capital investment. This result reflects the operating mechanism of most private equity funds. That is, regardless of the type of operation carried out, the quantitative and qualitative contribution within the target company does not change significantly between one type of operation and another. The trend observed in table 8 also finds some correspondence in table 9, where investments involving majority acquisitions are differentiated from minority acquisitions. Again, despite the subtle difference in favor of majority investments, the T-tests do not report the means as significantly different form each other. The data shown in table 9 faithfully reflect those of table 8 as buy-out investments mostly refer to acquisitions exceeding 50% of the target company while growth capital operations usually involve minority acquisitions.
This result may very likely have arisen above all from the fact that the sample contains an insignificant number of minority investments of less than 25% (8 observations). In fact, in these cases the average performances recorded in the three years following the investment are significantly lower than the average restated for each indicator. On the other hand, minority investments with an acquisition of more than 25% of the company and majority investments report results that are similar, with minimal deviations. The private equity fund aims to obtain a substantial capital gain from the sale of the acquired shareholding. for this reason, the funds generally prefer a majority acquisition or, in any case, very close to 50%. With a majority stake in the company, an investor is incentivized to prioritize the business’ strategic growth and ensures its operational approach is aligned with the business strategy from the start of the relationship. When a firm is more focused on a company’s long-term success, intellectual capital provides exposure to outside expertise and best practices.
After having highlighted that, considering different sub-sets of the sample, the average growth rates are mostly similar and there are no significant statistical differences, the next step is to compare the performance of these companies before and after the investment, with the aim to identify any significant differences in the growth rates of the indicators. The data recorded on the EBITDA growth rates of the small and medium-sized enterprises analyzed show trends similar to those of revenues, however with some anomalies. First of all, the investments made in 2013 show a much higher CAGR of post-investment EBITDA (approximately 12%) compared to the pre-investment years. The other periods present data very similar to those found in graph, however the investments made in 2016 show a post-investment CAGR slightly lower than the pre-investment CAGR. Overall, the total average still indicates a higher post-investment CAGR of around 4%, thus confirming the positive impact of the investment despite the excellent growth recorded in the previous three years.
By observing the graph relating to the Net Profit, we can observe how the growth rates in the four reference periods behave significantly differently from those recorded in the previous graphs. The growth rates are very high compared to Revenues and EBITDA, with a post-investment average in 2013 of almost 40 percentage points. In 2014 and 2015, however, post-investment data was much lower than pre-investment data, confirming the fact that in those years, the intervention of a private equity operator did not have a positive impact. Overall, the total average post-investment CAGR is slightly lower, by around 0,40%, compared to the pre-investment average, so the growth rate remained substantially unchanged before and after the investment. We note that the CAGRs relating to the total assets of the target companies are essentially very similar between the pre- and post-investment period.
The only significant difference is represented by the investments made in 2015, where the post-investment growth rates exceed those pre-investment by approximately 7 percentage points. Overall, the total averages are high both pre and post investment but in any case, they do not differ significantly from each other (about 1% difference). A relevant aspect is also represented by the fact that the investments that took place in the other periods (2013, 2014 and 2016) show lower growth rates in the post-investment period, therefore the total average is greatly influenced by the year 2015, without which the average growth rate of total assets would be slightly lower in the three years following the investment. Result could be mainly due to some limitations within the sample. One cause, in addition to the small size of the sample comprising observations, could be due to the fact that the database considered does not differentiate the analysis between different sectors. As a private equity investment brings not only a financial contribution but also an endowment of know-how and expertise, the fact that the database contains more than one investment sector could prevent the recognition of a significant difference in performance before and after the investment period. Results, however, show how the two types of companies differ with reference to the average Employees three-years CAGR (t= 1,5658; p ≤ 0,05). This finding is coherent with the main results provided by an already mentioned EVCA research paper which reveals that private equity and venture capital play a vital role in the conservation and creation of employment at a European level. The research in question highlights that employment grew by an average rate of 5,4% annually over the period between 2000 and 2004, this data is reasonably comparable In conclusion, we can say that, comparing the averages, 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.
Giuseppe Incarnato – Chairman & CEO IGI INVESTIMENTI GROUP
