What drives investment decisions on equity stake in private equity? The Italian case before and after the great financial crisis

Giorgio Cesario,Gimede Gigante

doi:10.22495/cocv18i3siart1

Abstract

The paper aims at developing a framework in the context of the Italian market to explain whether the equity stake acquired by private equities (PEs) in a target company changes according to certain firm-specific and deal-specific characteristics. In addition, the study analyzes whether the 2008 global financial crisis has affected investment decisions as well. The study focuses on a sample of 178 deals involving Italian companies in one of two different timeframes: 1) the pre-crisis period, including deals from 2003–2007 and 2) the post-crisis period, including deals from 2013–2017. The sample was extracted from the Private Equity Monitor Report (http://www.privateequitymonitor.it /pubblicazioni.php) and selected from 937 available deals in the period 2002–2018. The analysis has been carried out by using multivariate regressions to understand which factors influence the percentage of equity acquired by private equities. The results of the analysis show that PEs acquire higher stakes whenever the company is not privately owned by a family, the economy is recovering from a crisis and the company has lower margins or has recently recorded lower revenue growth. The paper contributes to the existing research on Italian private equity activity by widening the scope of other similar studies available so far. Thanks to an innovative approach we also initiate a new stream of analyses and studies aiming at fine-tuning, improving, and updating the framework that might predict, ex-ante, the level of PE investments in a certain economy as a “dependent variable” of companies’ specific characteristics.

Highlights

According to a recent report (Bain & Company, 2019) from 2014 private equity industry has achieved unprecedented success in terms of money raised, investments made and returns achieved by investors, compared to any prior period
The aim of the study is to understand how different features and/or indicators of the target company, such as governance, profitability, growth and size, as well as the investment stage and valuation operated by the private equity in the context of the acquisition, affect the equity stake a private equity is willing to acquire in that company
In the Italian market despite they started operating in the90s, their role became relevant recently and precisely from 2003 when leveraged buy-outs (LBOs) were deemed as legal

Summary

Introduction

According to a recent report (Bain & Company, 2019) from 2014 private equity industry has achieved unprecedented success in terms of money raised, investments made and returns achieved by investors, compared to any prior period. PEs use risk capital and financial leverage to buy-out a company or to financially support its expansion or even to turn around a company in economic distress. PEs‘ investment in the target company consists of risky capital and of human capital, namely, the fund directly enters the board of directors and substantially it becomes the key decision-maker for the future of the company and its operations. The legislator fully certified the legal soundness of leveraged buy-outs (LBOs) only in 2003 (Cumming & Zambelli, 2010)

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