Private Equity in Italy: overview of the industry and analysis of remarkable cases

Over the past few years Private Equity (“PE”) has become one of the most important investment activity in the corporate finance context. The purpose of this paper is to describe the PE industry and understand how this type of alternative financing affects target company performance. In addition, there will be a focus on the evolution and the current state of PE in Italy, with an analysis of empirical cases useful to demonstrate concretely the impact of funds on the companies dynamics. The first chapter of the paper provides an introduction to private equity by first defining the key aspects of this alternative investment activity. An overview of the PE industry is provided by reviewing the main articles and studies published in recent years in this context. The focus will then be on a description of the main types of private equity investments, trying to identify common aspects and differences between them. After that, the organizational structure of a PE fund will be presented, defining the role of the limited partners (LPs) and the general partners (GPs). The chapter will also include, the description of the fund’s lifecycle and its phases: the fundraising, the investment period and the harvest period (with a focus on the most common exit options). Finally, the attention will be shifted to the PE in Italy, showing its current state and main characteristics, and providing a brief description of the key players active in this context. The main objective of the second chapter is to understand how PE funds affect the performance of target companies. Firstly, there will be a description of the main methods used by the funds to determine the value of a portfolio company and then it will be provided an overview of the main performance measures, focusing on IRR, return multiples and other indicators useful in assessing the operating efficiency of the company and its financial strength. The chapter will end with a description of how PE funds create value in target companies and what are the drivers of deal success. The third chapter is dedicated to the analysis of empirical case studies aimed at determining in practice the impact of PE funds on portfolio companies. The analysis will focus on buyouts (especially LBOs), as these are the transactions in which the PE fund acquires a majority stake, allowing it to directly influence the target company's decisions. The selected case studies involve Italian companies managed by national or international funds. The analysis will try to identify the key factors and the strategies implemented by the PE funds that have characterised the deal, determining its success or failure. The three main value drivers assessed in the analysis will be: revenues improvement, EBITDA change and Net Financial Position change. The data used for the financial analysis are taken from the “bilanci ottici” extracted from the AIDA database. In the last chapter, some conclusions are presented on the results obtained and some indications are given on possible future developments of the private equity activity in Italy.