10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
Lorenzo Gai
Full professor of Financial Markets and Intermediaries, University of Florence
Emanuele Martelli
Phd in Financial Markets and Intermediaries, University of Florence
R
A BSTRACT
Scope of work is to develop an interpretative analysis of private equity held by local public investors in Italy (typically referred as “regional finance company”). In particular, the paper aims to highlight current trends, the possible evolution paths and weaknesses.
The research methodology starts from the review of international literature on characteristics of private equity contracts and then provides a qualitative survey through interviews with a sample of the population observed.
The paper is divided into two parts. First we will describe some general information on observed investors and the characteristics of the Italian private equity market. In the second part the set of information collected by interview are processed in order to set up a proper scenario of regional finance companies, focusing their main features in comparison with international situation as well.
The main source used for market analysis is the annual survey of AIFI (Italian Private
Equity and Venture Capital Association) and PWC (PriceWaterhouse Coopers), while the interview was conducted directly by the authors.
The items identified suggest that a major restructuring is progress on the whole system of local public investors.
First, it was possible to observe that the investment policy of the regional finance company is complementary to that expressed by the average domestic market, although the investments in targets with sales between 2 and 10 million euros, remain critical (and few).
The evidence about the contract’s structures indicates a partial compliance with international best practices mentioned in the literature: the reduced use of stage financing and low participation in management are the main weaknesses identified.
Finally the investors, questioned on their future in private equity market, have given indications which allow to point out the existence of a substantial polarization of all system of regional finance companies: on one side there are companies which leave the private equity in short time, to concentrate its action on other instruments; on the other side some others which develop the investment activities.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
1.
G
ENERAL INFORMATION OF THE
I
TALIAN PRIVATE EQUITY INVESTORS
The international economic policy’s debate on factors underlying the development of enterprises underlines the role of reforms in product and labor markets, dissemination of technical and organizational knowledge, investment in research and development. It has recently been further analyzed the contribution of financial factors (Philippon-Veron, 2008).
In particular, private equity is considered an important tool in fostering new business and growth of existing ones, especially in sectors linked to new technologies, where is strong the presence of information asymmetries. Unlike the United States and the United Kingdom, the development of private equity in Europe (and specially in Italy) is still limited.
The origin in Italy of a real field of professional specialized in equity investing can be traced back to the mid-eighties, when nine private companies regrouped to create the Italian
Association of Private Equity and Venture Capital (AIFI).
Over the years the number of operators and their profiles have been developed significantly in terms of changes in the national economic and financial scenario and in the regulatory framework, that governs the legal structures used to perform the investment activities in equity (Bracchi Gervasoni, 2006). It should be recalled that initially and until
1986, the activities of investment in equity was not permitted to Italian banks. Only after these institutions were also entitled to investment activities, while complying with specific constraints; now also them were abolished.
For the development of the sector was key the formal establishment under Italian law, in
1993, of closed-end funds which, over time, become the main tool for the progress of investment in unquoted equity.
The expansion of private equity has been rapid since the second half of the nineties. As a first step (between 1986 and 1996) a limited number of stable operators was active private
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2 equity, a real sector development is observed between 1997 and 2001, when the diffusion of new IT has attracted financial resources by encouraging the emergence of new investors.
Then followed a period of relative stability, interrupted in 2005 by the launch of a new cycle, characterized by further signs of renewed growth and vitality of early-stage segment.
Currently the sector, which suffers a difficult economic time, record a phase of reorganization, primarily driven by changes in market conditions of the debt (Bracchi, 2008).
The main categories of professional investors currently active, classified according to operational characteristics
1
, are identified in:

Italian closed-end funds managed by asset management companies (in Italy named
SGR) and other local general funds (country funds);

Funds that specialize in this segment of early stage;
 pan-European funds;

Italian banks and their subsidiaries;
 public and regional investors.
During the start-up of private equity and venture capital, were local actors, most organized like investment companies, to promote the growth of the sector, representing almost all active players.
Later the market has seen the gradual emergence of international players: the funds socalled “pan-European” or global, virtually absent in origin, are now passed to represent a share of between 25% and 30% of the market, demonstrating an openness of Italian system towards the European and North American context.
In the mid-nineties have started operating the first asset management companies (SGR) of closed investment funds, established by Law no. 344/1993. These companies have gradually
1 The proposed classification is that used by AIFI and EVCA (European Private Equity and Venture Capital
Association) to segment the market for statistical purposes, however, shared by the dominant national literature.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2 consolidated their presence, coming to represent the end of 2008, approximately 30% of the operators.
Even banker investors recorded a notable increase in the late eighties, to count in terms of number of players, about 50% of the total supply and then settling on a share of around 30% of the market in the late nineties. After 2000 the presence of the banking divisions of the total operators began to decline due to the creation of many closed-end funds for the promulgation of these banking groups. Recently, this trend was interrupted in presence of a reduction in the number of asset management companies promoted by the banking sector and of the increased importance of independent investors. Indeed, the banks participate in an ever more significant to private equity, but like funds investors, replacing the role to that of a facilitator of investment vehicles, or even a direct investor (Bracchi-Gervasoni, 2006).
The population distribution of active players in the period 2006-2008 (figure no. 1), shows that half of active investors is represented by asset management company (SGR) and country funds, but also (implicitly) how high the interest pan-European funds for the Italian market; fact that it confirms the attractiveness. Total the average number of operators active in the reporting period is equal to 143.
Looking now at market share for the same period (figure no. 2), about a third of transactions was carried out by an asset management company (SGR), followed by regional/public investors (24%), Italian commercial banks (14%), early stage investors (11%), country funds (10%) and pan-European funds (8%). Overall, between 2006 and 2008 have improved 966 investment.
These data shows clearly the importance of public operators in the domestic private equity market. Particularly active in start-up and expansion deals, public investors monitored by the used survey are represented mostly by their Regional finance companies.
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10th Global Conference on Business & Economics
2.
T
HE CHARACTERISTICS OF
R
EGIONAL FINANCE COMPANY
ISBN : 978-0-9830452-1-2
In the context of Italian public finance for enterprises, Regional finance companies occupy a key position. Almost all the regional governments, in fact, are now equipped with specialized vehicles to enable the pursuit of regional economic policy and able to contribute to the promotion of the Region reference.
The origin of these institutions is between the late sixties and early seventies, when still the same Regions did not have financial autonomy. With the process of administrative decentralization recently launched a result, in particular the reform of Title V of the
Constitution, the Regions have become leading actresses in offering incentives to businesses, as well as increasingly active players in national economic and financial system. The new concept of public finance, emerging from this evolution, is based on the assumption of integrated management of issues relating both to the financing arrangements for efficient use of resources, paying attention to transactions and instruments that can be used for this purpose
(Giorgino, 2008).
If traditionally public intervention is concretized in the provision of grants or soft loans
(interventions that often, because of too many and not very selective, have resulted simply forms of assistance), now did the need for action qualitatively different, which is oriented to supporting public policies in accordance with principles of selectivity and efficiency, that combines the resources and expertise of the private sector.
In those circumstances the Regional finance companies were brought to play key roles in managing the regional credit and implementation of interventions to support economic development in the area. In detail, the operation usually takes the form of Regional finance companies, disbursement of funds in synergy with the banking system, management of regional financial facilities, participation in the capital of SMEs and consulting at various levels (technical, strategic and financial). In this regard it is necessary to point out how the
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2 system of Regional finance companies has always been heterogeneous in terms of business models, but also to ownership structures and capital equipment. In every case the variety does not appear to have altered the generality of the activities (with the obvious statement that not all companies take care of everything).
Combining the information provided by literature, the Regional finance companies can be defined:
 institutional level: institutions instruments for the implementation of economic, territorial and rebalancing employment in the region where they operate;
 functionally: dli tools to support system of small and medium enterprises in the region and local development processes geared to managing the regional credit and assistance to local authorities;
 formal terms: corporations to entrepreneurial vocation, but configured as LTD with a majority public capital.
3.
M
AIN TRENDS IN PRIVATE EQUITY TRANSACTIONS IN
I
TALY
Over the last three years (2006-2008) the Italian private equity and venture capital market has witnessed a growth process about the number of deals and about the amount invested.
This was an average of about 4,5 billion euros each year, while the number of transactions stood at around an average of just over 320, involving about 260 different companies each year.
In terms of stocks, in December 31 2008, the value (at the cost) of the investor’s portfolio was approximately 16,8 billion euros, these resources are invested in 1182 companies.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
During the same period, most capital was invested in buyout transactions, which on average each year attracted just over 65% of total capital invested in the whole market, followed by expansion (21,5%) of replacement (12%) and, finally, venture capital (1,5%).
Looking at the distribution of the investment’s number by type (figure no. 3), excel expansion deals, with little more than 120 speeches each year, distributed an average of 103 different companies. Below are buy-out (100 for a total of 75 companies), venture capital (79 operations in 64 companies) and replacement (22 operations).
In comparison with other European markets, the segment of early stage and, in particular, investment in new high technology companies, is still underdeveloped, compared to a gradual growth of deals directed towards mature or growing, medium enterprises. However, in recent years have started some initiatives and specialized private funds, mostly supported by their
Regional finance companies and local government, dedicated to the segment called “seed”
(Bank of Italy, 2009).
Other types of interventions, such turnaround on firms to restructure, although already relatively widespread in other countries are still developing in Italy. Around this segment reporting an increased interest, partly as a result of regulatory changes made to the bankruptcy law, designed to encourage the revival of business in crisis.
The high use of buy-out, leading to a change of shareholding structure, often in favor of the managers who guide the company, is partly related to the structural characteristics of
Italian SMEs and their life cycle: increasingly, indeed, these companies are having to face with delicate processes of generational replacement (Peveraro, 2007).
The strong impact, both in number and amount, of buy-out is not, however, typical of the
Italian market, but is also found in other countries such as Germany and France, for the similar characteristics of European enterprises.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
The investment’s analysis for classes of investors indicates that at the pan-European funds are attributable, in the period 2006-2008, average annual investment values higher (over 2,5 billion euros spread over about 27 investments), followed by SGR and county funds, which together have an average employee amounting to just over 1,2 billion euros, making about
138 investment. Is more limited, however, the activity of the banker investors, regional investors, and that of specialized funds on early stage with a total amount invested each year approximately 575, 62 and 25 million euros. These findings indicate that the pan European funds tend to focus their investment on a few large transactions (large and mega deal), while other actors, especially public and venture capitalist, making several deals with smaller dimensions.
Overall, the market has in recent years an increase of the average investment per transaction, rose in 2008 to around 14,7 million euros from 12,8 million in 2006. The normalized data, net of large and mega deals made during the year is, however, less stable, at
8,9 million euros in 2008, compared to 8,5 million euros in 2006.
The average size analysis of target companies shows that big part of the deals has focused on SMEs. Businesses with fewer than 250 employees in the period considered were covered
73% of all deals: the majority of investors focuses its investments in companies with characteristics typical of Italian industrial fabric.
The distribution analysis of the number of investment transactions for sales classes confirms that the small and medium sized companies (turnover less than 50 million euros) accounted for three years, the main target to which were directed the investments, with an average share of 69% of the total number of transactions.
With regard, finally, the geographical distribution of investments on the Italian territory, remains an imbalance that has seen, in three years, the northern Regions attract 78% of capital invested and 67% of investment improved, while the central Regions has won 15% of and
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
19% of the investment. In the South was hit just 2% of the amount corresponding to 4% of the investment. The dynamics of investment suggests, however, greater attention of traders to businesses located in the Centre, while remaining almost constant transactions in the South.
4.
A
GGREGATED INFORMATION ON FUND RAISING
,
DIVESTITURES AND PERFORMANCE
The average fund raising, in the 2006-2008 period, was approximately 2,5 billion euros.
Most of these funds come from independent raising activity on the national and international market (1,8 billion euros in the three years average), while just under 23% is attributable to capital provided by the parent company of so-called captive funds (about 580 million euros).
There remains the marginal share of capital gains from the same private equity activities that are available for reinvestment (about 100 million euros.) According to international methodology, these data do not consider the resources due to pan-European funds with a stable base in our country, underestimating, therefore, the total value of resources available.
With reference to the geographical origin of the funds collected, the last three years the share capital of international origin has on average exceeded 40%, first confirming the interest of foreign institutional investors, particularly Europeans, on the Italian market, other highlighting the reluctance of domestic investors to allocate part of their assets to the private equity industry.
Considering, then, the origin of capital, resources from banks and funds of funds represent the largest share of total resources flocked to the market, representing a whole just under 43% in the period 2006-2008. Downstream of a strong growth in 2008 individual investors, and industrial groups rose at 17% and 9%, followed by pension funds (just under 9%), the foundations (6%), insurance (5,5%) and public institutions (2,2%). Other sources are relatively marginal.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
The dynamics of divestments and values divested amount reflects that of other indicators.
Over the last three years the annual average amount divested was approximately 1,9 billion euros, while the number of target companies to divestment was approximately 160. In terms of way out, the Italian market is characterized by the predominance of trade sale to industrial partners, used in approximately 44% of cases. Below, 19%, the supplies to other financial investors, while the IPO is still little used, with an average share of 8%, a phenomenon consistent with that observed in Europe. The write off is observed average around 11% of total divestments.
Performance recorded in the 2006-2008 period confirm, finally, the good health of the market (Bracchi, 2008). Despite the decline accused last year (in contrast with a growing trend that continued from 2003), the aggregate gross IRR is an average of 25,5%.
5.
T HE BEST PRACTICES IN PRIVATE EQUITY : SIGNS OF LITERATURE
The classical problems in every relationship of financing - uncertainty, information asymmetries, agency costs - become particularly intense in the private equity market, given the kind of business financed and characteristics of the lender’s intervention.
Under a recent survey by the Bank of Italy on the characteristics of domestic private equity transactions, downstream of a structured review of international literature, was found a sort of best practice. In fact a large literature suggests that using best of particular instruments and contractual governance can select the best projects, to encourage the entrepreneur and give to investor incisive powers of control over the company. Empirical study of the Italian
Supervisory Authority has confirmed the use of these contractual instruments, already widely occurred in the North American context, even in Italy.
The optimal structure includes, according to the literature, some characteristic features.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
First, the contribution of the investor often takes the form of hybrid equity-debt that allow non-proportional allocation of cash flows and variable depending on its progress. The superiority of these instruments than of “pure equity” or “pure debt” is widely reflected in the theoretical literature (Sahlman, 1990, Gompers, 1997; Schmidt, 2003; Megginson, 2004;
Hellmann, 2006) that - either well with a variety of topics - highlights the positive aspects. In general, hybrid capital instruments protect the investor in adverse scenarios, while maximizing the return on investment scenarios favorable, play a selection of the best entrepreneurs and helps to align the incentives of the parties.
Another important feature is the allocation of the lender incisive powers of monitoring on the funded enterprise, are also variables in relation to the development of the project and carried through right to appoint members of the board and veto powers on major operational decisions and strategic enterprise (Sahlman, 1991, Lerner, 1995; Hellman, 1998, Cumming,
2002, Kaplan and Strömberg, 2003, Megginson, 2004). These relate, for example, the veto on decisions on capital increases, the degree of indebtedness, the remuneration of management and the entrepreneur; the latter profile is generally expected the intensive use of incentive schemes aimed at acknowledge remuneration linked to business outcomes rather than short term.
Also to protect the investment of the investor, are usually also negotiated non-competition clauses which prevent the entrepreneur activity in areas similar to those in which the company financed or use of the name.
Finally, is widespread the use of clauses that provide the guarantee way out for the investor, while limiting the power output of the entrepreneur by the company (Klausner and
Litvak, 2001; Cumming, 2002; Megginson, 2004). A number of factors make the phase of exit very delicate, and motivate the presence of specific clauses. Typically in the private equity deals, the company is not listed and the ability of the entrepreneur play a key role in the
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2 success of business development. The sale to third parties of the entrepreneur’s participation has obvious effects on the value of investor’s participation. Hence the need to use clauses that regulate, restrict or exclude all of the exit power of entrepreneur, while the investor provide a way for divestment if the company is not sufficiently profitable after a certain period of time.
The venture capital deals are reflected in a particular financial structure of the target. From the empirical analysis show that, in venture capital transactions, the participation of the entrepreneur is usually the most: in a context in which the commitment of the entrepreneur is crucial to the success of the project, this choice is to promote its investment in human capital.
The venture capital is also characterized the widespread use of stage financing, namely the use of covenants that divide the funding into several steps, each tied to compliance by the undertaking of certain objective results (Sahlman, 1988; Gompers, 1995 ; Klausner and
Litvak, 2001; Cuny and Talmor, 2004; Bienz and Hirsch, 2006). The breakdown stage decreases exposure of the investor to the overall risk of the deals, also because each new tranche of funding is conditional upon production by the entrepreneur, specific information on the project are mitigated in this way informational asymmetries in the funding relationship and increases the opportunity to assess ex post the ability of the entrepreneur. At the same time, the implicit threat that the investor exercises over by the right to abandon the project at each successive stage has ex ante effects: it acts as an implicit method for selecting the most capable entrepreneurs, contributes to more transparent and objective information provided by the entrepreneur in the definition of the financing agreements. These advantages are accompanied by a few flaws: the effectiveness of the threat to abandon the project may be low if the lender has already invested significantly in the enterprise, the division of funding for stadiums may induce the entrepreneur to focus on short-term strategy . The empirical analysis however confirmed a widely used staging, especially in financing young and innovative companies where the risks, information asymmetries and agency costs are higher.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
The literature has also focused on the activism degree in practice exercised by the venture capitalist and the relationship between this and the characteristics of the transaction. Kaplan and Strömberg (2004) show that the activity of venture capitalists is greater if is larger the intermediary control on business decisions and that the advice grow with the share capital held by intermediary. Bottazzi, Da Rin and Hellmann (2004), using European data, analyze the activism degree in relation to the characteristics of venture capitalists and investment intermediary. The results show that investors with more experience and “independent”, i.e. not related to banking intermediaries, are more interventionist. Furthermore, increased activity appears to increase the chances of a listing.
Hellmann and Puri (2000) examine whether venture capital fund innovative companies most frequently or those who base their production on imitation of existing products; also evaluate the relationship between the type of funding and the time taken to launch a new product. The results show that venture capitalist tend to financing innovative firms and that they market their product more quickly when they are financed by venture capitalists.
The buyouts, finally, they differ from venture capital investments, particularly as regards the equity share of intermediary, which is often the majority and less frequent staging of financing. Incentives to achieve business plans are usually implemented by increasing the leverage, which leads to research projects by high performance, a stronger relationship between management pay and performance firm and an intense control on the actions of management (Jensen 1989; Kaplan 1989).
Summing up the contributions reviewed indicate which characteristic elements of best practice:
 the use of hybrid capital instruments-debt;
 the allocation of the lender incisive powers of monitoring;
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10th Global Conference on Business & Economics
 negotiation with the contractor of non-competition clauses;
ISBN : 978-0-9830452-1-2
 the anticipate definition of the conditions for the investment exit.
For venture capital, the literature analyzed also indicates the use of stage financing.
6.
S TRUCTURE OF QUESTIONNAIRE
The interview collects information on private equity held by Regional finance companies and is addressed only to themselves. In particular the set of prepared questions designed to document some general info on investment policy, to provide an initial assessment on similarities and differences compared to best practice proposed above, and to seize certain distinctive features of the situation to strive for.
To this end the interview is divided into four sections. The first, general, collects information such as the coherence degree of private equity with the mission, as the way chosen to do the activities (direct investment, indirect or otherwise) and certain related information on human resources dedicated (number, composition and education). In this first part were analyzed the investment phase preferred (corporate operations in the early stages of development, expansion, replacement of one or more partners, buyout or restructuring), the presence of any sectoral focus, or focus size, the strategy adopted for origination (intensive or extensive), the average amount of investment and some details about the deal flow
(consistency and success rate).
In the second section, in more analytical perspective, the questionnaire examines key pad profiles reported in the literature. The information concerns: the consistency percentage of equity acquired, the type of securities mainly used (only equity, hybrid instruments, or both), the rights incorporated in them and any warranties that assist them, if and how the disbursement of funds was divided into several rounds, put the achievement of specific
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2 objectives (staging), the frequency of transactions in trade union or in partnership with other actors, the representativeness of Regional finance companies in board of directors (power to appoint members), the possible veto rights provided and the type of operations on which they insist, the presence of non-competition clauses and stipulations on the divestment period, the legal form through which such agreements are expected. Closes the section analysis of the role of advice (if any) played by the Regional finance company.
The third section collects information on profitability and divestment. These issues were investigated by requesting summary information such as the average annualized gross return achieved in the divestments made in the last three years, the impact of write offs over the last three years is the number on the amount of divestments made in the same period; approximate investment. Finally has been asked info about the exit.
The last section analyzes the assessment of the future situation view from Regional finance companies. In particular their opinion on the development drivers and the main hampering factors. Closes the section, the request to indicate that regulatory intervention is believed to promote investment activities, and a free space devoted to comments on the subject of research.
The questionnaire-interview just described, was sent to a sample broadly representative
(being composed of fourteen Regional finance companies on a total population of sixteen).
7.
T HE RESULTS
Private equity activity is considered consistent with its mission to the majority of Regional finance companies respondents (65%), two institutions (14%) reported even as the central instrument of support measures for SMEs, while about a fifth of the sample considers marginal (21%).
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
Direct taking of equity appears to be the form chosen by most of the companies interviewed (79%), although some institutions have developed several different “tools” for investment in equity.
Human resources permanently dedicated to private equity almost never exceed ten units and 71% of the sample it takes less than five. These resources are mostly middle or senior managers (72%), rarely executives (13%) or employs (11%); some firms use also the continued assistance of outside consultants (4%). Is graduate the 94% of the entire workforce, mostly in the business administration or law.
Turning to investment policy, almost all companies respondents identified in early stage
(46%) and expansion (43%) the favorites stages for investments. Only a minority of institutions agrees to evaluate turnaround deals (11%). This orientation is fully in line with the information tracked by the survey AIFI-PWC about the public actors.
The absence of a specific sectoral focus characterizes the investment activities of all
Regional finance companies, except that Lombard, operating exclusively in the biotech sector.
By contrast almost all the institutions has a clear focus dimensional, focusing mainly on its action: medium (46%) and micro enterprises (36%); lower attention on small businesses
(21%). Disaggregate the already known focus on SMEs identify interesting information, which is consistent with the findings of some recent studies. In Italy it is still poorly manned segment of investors dedicated to companies which, although already underway, are characterized by critical level of sales, that put their lives at risk in the absence of a boost to growth and a financial partner ready to support them. These are just small businesses, that, with turnover of between 2 and 10 million euros, are not attractive for a pure venture capitalist and for an investor, which moves on target companies more mature (Bank of Italy, 2009).
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
In relation to the average amount of investments, the systems of Regional finance companies is structured, indicating the range 0,5-2 milion euros for 64% of the vote, while the remaining 36% goes to investment between 2 and 5 million euros.
There was, instead, possible to identify a dominant origination strategy: most of the sample (79%) indicated both the approach, extensive and intensive. Clearly the dependence of an investment part by regional measures, coupled with steps taken to applying the internal capital, is not sufficient to conclude one way or another. The remaining minority (21%), represented by some very sophisticated institutions, that employ mainly their own resources, he indicated the proactive approach.
Concluding the review of information collected in the first section, it is interesting to emphasize that almost all sampled companies declare an annual deal flow less than 100 investment opportunities. In particular, half (50%) of respondents indicate it below 50, while just over one third (36%) between 50 and 100 opportunities. For the two companies the deal flow exceeds 200 per year. Its success rate remains for all institutions surveyed values above
5%.
Below are summarized the main features of the contractual operations undertaken by
Regional finance companies, with the obvious statement that, as they are graded according to the level of opacity and risk investment, in the interview were asked to refer to the practice generally adopted.
Using a mix of debt and equity, is its peculiarity for most of the institutions included in the sample: 82% report it as fact, alongside the provision of credit often the acquisition of shareholdings. The remaining share (18%) indicates instead the exclusive use of equity. The securities not incorporate almost never special rights and equally rarely have specific guarantees.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
The breakdown of the funding (by way of equity) in “rounds” is a widespread practice after only three companies (21%), while in relation to the presence of “milestones” where the use is conditioned, the percentage of use falls further to 14%. Very low but the frequency of transactions in partnership with other investors.
Much higher is the frequency of affirmative answers when asked if the entrance into the shareholders by the Regional finance company compels the appointment of persons outside the enterprise in the administrative board: 79% of the sample. High also the percentage of companies standing to reserve veto rights (71%), mostly insisting on extraordinary transactions and changes in share capital.
The companies tend to include non-competition clauses for the entrepreneur: using reflecting, inter alia, that the activities of the entrepreneur and his ideas form an important
“collateral” for the investor; the its relevance in terms of recoverability of the investment is higher when the organization is not equipped with a sufficient amount of collateral. It shows also an almost constant use of covenants that restrict the right of exit of the entrepreneur
(86%) and protect the release of the investor (93%). In most cases, these clauses are included in the statute, rather than determined by shareholders' agreements.
In the presence of contractual provisions that specify their rights, the private equity investor has the possibility, at least theoretically, to affect significantly the management.
Particularly in the case of early stage deals, compared to other types of transactions, the relevant knowledge plays a more important role in guiding the choice of the intermediary by the company (Bracchi, 2008). It is therefore important to understand to what extent the investor play a active role in managing the company and the profiles of they contribution. The results indicate that institutions have provided support mainly on financial aspects (55%) and the definition of strategies (26%). Moreover, they played a “certification”, facilitating the collection of resources from other and improved relationships with banks (19%).
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
In contrast, the Regional finance companies seem to offer limited contributions in the technical aspects of product development and improving access to suppliers and distributors.
Qualitative information gathered during interviews suggest that the modest contributions on technical and production management but would be partly attributable to the entrepreneur approach that, especially in the case of expansion, has already gained experience in the field and considers it not useful “intrusion” by parties sometimes who have no detailed knowledge of the market where company works.
Interestingly, unlike the empirical evidence available, specially for expansion investments, that the companies interviewed do not seem to be an important element in facilitating the initiation of developments abroad, or more generally the activation of internationalization process.
The participation of an intermediary to corporate life is also linked, in theory, with the shares owned. Empirical evidence shows that national experience, while for buyouts the private equity investor hold a share that provides control, for other kinds of transactions (early stage and expansion) participation, with reference to the first round of funding is on average about one third of the equity (Bank of Italy, 2009).
The survey shows a figure consistent with this evidence: the Regional finance companies buy shares on average 30%. This result is also consistent with the directions of theoretical literature (the amount of shares held by the entrepreneur is a key incentive), also consistent with the literature is the greater presence in these cases, the complex of covenants that tend to give at the minority shareholder (ie the investor) powers of supervision and monitoring.
So the share hold by Regional companies is relatively large and, together with the presence of statutory provisions and shareholders' agreements, could lead to his activism in high management.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
Based on the responses you can prepare a synthetic indicator of “activism” of the institution, taking into account the advice given. This indicator shows a positive relationship with the presence of clauses to protect the investment and the share held by the intermediary.
This might suggest that the investor tends to become more involved when it investment is adequately protected. The evidence however is based on a simple correlation, which lacks further investigation. Therefore the results should be interpreted with caution.
In relation to the return profiles, the data support the conclusion (such as it was reasonable to assume) that the gross IRR per annum on average recorded by Regional finance companies, shall reach values significantly lower than the market average. For the 2006-2008 period, in fact, eight on fourteen institutions surveyed indicated an average gross return of less than 5%, two between 5% and 10%, while four did not respond.
Is low, however, the incidence of write offs made between 2006 and 2008, both on the number of exits, that on the amount, the figure reported by all companies respondents (nine on fourteen sampled) is less than 5%.
The average duration of the investment is over seven years for 79% of the sample, while it is between three and seven years for the remaining 21%.
The preferred way to exit is the trade sale, which collects 52% of preferences, followed by buyback (42%). Rarer sale to other investors (6%), which is marked by only two companies.
The information can be derived from the last questionnaire section provide interesting insights about the situation to strive for. In the perception of the investors the possibility that the activity of private equity held silent in the short to medium term is polarized: half of respondents do not expect major changes over the next three years and shows that the
“physiological” development can only be along the current guidelines. The other half, in true
43% of the sample as an institution has not commented about it, but indicates major changes in sight.
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10th Global Conference on Business & Economics ISBN : 978-0-9830452-1-2
In some cases these changes mean abandoning private equity, focusing on credit enhancement and regional measures management.
The companies interviewed has finally provided an assessment of the factors which hamper their development as investors in equity. Should to preface that with regard to this request, the sample, while reduced to ten units, is in fact the entire population of Regional finance companies that will keep the activity in the private equity market.
This “skimming” makes the information gathered quite similar: almost all institutions identified in the relevant law, the main obstacle to development (highlighting in particular the need to revise the Decree-Law no. 223/06).
The limits in the measures administered, as to the requirements of beneficiaries, are the other impediments reported by the companies, who complain more autonomy in the screening of applicants.
8.
C
ONCLUSIONS
From the interview results emerges as the investment policy of the Regional finance companies is very complementary to that average expressed by the domestic market; the analysis on the private equity market in Italy shows, in fact, as the intermediaries conduct primarily buyouts and expansion, while the companies interviewed confirmed to be oriented to support the start-up and early development. On the other hand fail to balance the lack of interest that exists between the Italian investors to small enterprises, focusing also on medium and micro enterprises. Therefore remain critical, even for the Regional finance companies the investment on businesses with sales of between 2 and 10 million euros.
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Full consistency is found, then, in the combination of data collected regarding the percentage of closing, high, performance, low; all in line with the heartfelt priority to the promotion of territorial development, instead of return on capital invested.
About the structure of contracts, emerges as this is partially compliant to the best practices identified by international literature. Even the Regional finance companies using a combination of debt and equity; the entry of these in the share capital frequently induce the appointment of their directors, mostly accompanied by significant veto rights; the contracts include clauses that limit the activities allowed the entrepreneur and protect the exit of investor. However, compared to that reported in Bienz and Hirsch, institutions observed do not seem to use much the stage financing, let alone carry out transactions in partnership with other investors.
If the transactions union may actually be impeding by the distance between the mission of the Regional finance companies and other investors (think about the returns noted above), the absence of widespread use of stage financing is a critical significant.
The Regional finance companies provide, almost exclusively, a contributions on financial aspects, by contrast, the share generally acquired is relatively large and, together with the presence of statutory provisions and shareholders' agreements, may still allow a greater participation in management.
Finally, the companies, asked about the future of investment in equity, have given elements to conclude the existence of a polarization in two groups: who will implement, more or less, the private equity activities and who, conversely, abandon this “tool”. The law on
Regional public companies (in particular the article 13 of Decree-Law no. 223/2006), and the lack of autonomy in the management of entrusted measures are considered the main brake factor on their growth in the private equity market.
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F
IGURES
Figure 1 – Distribution of number of invetors by type (average 2006-2008)
ISBN : 978-0-9830452-1-2
8%
9%
11%
19%
23%
30%
SGR fondi pan-europei country funds investitori pub./reg.
banche italiane fondi di early stage
Source: Author's elaboration on data-AIFI PWC.
Figure 2 –Distribution of investment’s number by type of investors (average 2006-2008)
11%
14%
24%
8%
10%
Source: Author's elaboration on data-AIFI PWC.
Figure 3 – Distribution of investments by type (average 2006-2008)
33% SGR fondi pan-europei country funds investitori pub./reg.
banche italiane fondi di early stage
7%
25%
31% early stage expantion buy out replacement
37%
Source: Author's elaboration on data-AIFI PWC.
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