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Italy

The economic impact of Private Equity
and Venture Capital in Italy*
March 2006

The economic impact of Private Equity
and Venture Capital in Italy*

Indice
1. Definitions
2. Methodology
3. The Italian macroeconomic framework
4. The economic impact of buy out
5. The economic impact of venture capital
6. Basis for conclusion
7. Glossary of terms and abbreviation

Definitions

Investment in risk capital is typically an investment
activity regarding the acquisition of (minority or majority)
stakes in the equity of non listed companies, with the
goal of increasing the value of the target company for
the purpose of a divestiture in the medium to long term.
Generally, in order to achieve the above goal, target
companies with a high potential for growth are able to
increase their value.
On the other hand, investors can offer not only financial
resources, but also professional and managerial skills,
as well as a network within the financial community.
Private equity activity is divided into venture capital and
buy-outs depending on the type of investor involved in
the investment.
Private equity operations are the following:
• Start up: financing provided to companies for
product development and initial marketing
purposes. Companies may be in their infancy
stage and thus in a start up phase, or may have
been in business for a short period of time but
have not yet brought their product to market;
• Expansion (also referred to as development
capital): financing provided for the growth and
expansion of a company, which may or may not
be in a break even position or be trading
profitably. Capital may be used to finance
increased production capacity;
• Replacement capital: purchase of existing
shares in a company from another private
equity investment organisation or from another
shareholder(s);
• Buy out: a transaction in which a business,
business unit or company is acquired from the
current shareholders (the vendor).
In brief, private equity activity can be categorized
according to its investment purpose as follows:
• Financing enterprises start-up;
• Financing enterprises development;
• Financing enterprises changes.
Start-up and development financing can be considered
as venture capital activity, whereas financing changes
faced by enterprises is deemed to be a buy out activity.
Definitions

Generally, the investment in risk capital significantly
contributes to the growth of the target companies and
has a positive impact from an economic and industrial
perspective. As a result, investors prefer businesses that
have unique characteristics, such as:
• companies that are able to achieve maximum
economic and financial performance and have a
competitive advantage with a unique successful
product;
• companies managed and operated by an
entrepreneur capable of achieving its business
and personal goals;
• companies whose management has an
abundance of experience and knowledge of the
sector;
• companies where a divestiture could ensure
profitable financial returns on the investment.
The typical goal of a private equity investor is to
increase the value of the target company, aiming at
obtaining maximum financial returns on the
investment and choosing the most suitable exit strategy.
The most common exit strategies are the following:
• IPO: the sale or distribution of a company’s
shares to the public for the first time;
• trade sale: the sale of company shares to
industrial investors;
• buy back: a corporation’s repurchase of its
own stock or bonds.
There is also the possibility to write-down the book
value of a company in an investors portfolio to nil.
The book value of the investment is eliminated with the
return to investors being zero or negative.
As mentioned previously, private equity activity is not
just profitable for the investor, but the investment in risk
capital generates a positive economic impact from an
industrial perspective as well. All research was
performed by AIFI and PricewaterhouseCoopers
Transaction Services and was meant to analyse the
effect of private equity activity on the Italian market.
 
has been calculated as the difference between the value
of production (caption A Valore della Produzione) and
production costs (caption B Costi della produzione),
with the addition of depreciation and amortization of
fixed assets.
All figures are those contained in the official statutory
accounts, as published on Cerved database.
CAGR calculation
For each of the above indicators the arithmetic average
and the weighted Compound Annual Growth Rate
(CAGR)1 have been calculated.
In particular, CAGR has been used to have a percentage
describing the rate at which an investment would have
grown if it grew at a steady rate.
The weighted factor is given by the annual average
percentage of each indicator for each company as a %
of the total respective average registered from the
sample as a whole.

The sample
The research has been prepared on a sample of
divestments undertaken in Italy by private equity
houses, in the period from 2002 to 2004. The analysed
sample consists of 70 Italian companies (out of
approximately 202) of which 38 were venture capital
and 32 were buyouts and was created starting from a
list of all the companies divested over the period and
excluding those targets:
• whose name was undisclosed or not
identifiable;
• represented by non operating holding
companies, small co-operative and state
companies;
• whose most current financial data was not
available;
• not representing a real divestment but a mere
transfer of shares between shareholders
belonging to the same syndicate.
Overall, when considering the exit of the investment
(i.e. the opportunity for the private equity of selling the
investment), 50% of the companies included in the
sample were sold through a trade sale, 17% were
floated to the stock market, while 14% have been sold
to another private equity house. The remaining 19% is
represented principally by buy back.
More specifically, IPO appears to be the preferred exit
strategy of venture capital backed companies, while buy
outs are more frequently divested through sales to
corporate or private equity houses.

In connection to the business, 59% of the companies
included in the sample are concentrated in three
sectors: consumer goods, manufacturing and industrial
product and services. This concentration grows to
approximately 70% when considering buy outs only,
while venture capital backed companies are more
widely distributed over various sectors, including the
high tech, telecommunications, internet, computer and
electronic sectors.
48% of companies included in the sample may be
defined as small/medium sized since the related
headcount (average of the holding period) is lower than
250, both for buy out and venture capital investments.
Companies included in the bracket >1000 mainly
includes buy out.

With regard to revenues, 46% of companies
experienced a level of revenues lower than € 50 million,
in particular if it is taken into account the venture capital
segment only.
In summary, the profile of the sample reflects the main
characteristics of private equity and venture capital in
the Italian market.
The benchmark
To measure if the sample under or over performed the
market, the results of the research are compared with
the performance of the medium sized Italian companies.
The selected benchmark for comparison was calculated
on the basis of information included in “Le medie
imprese industriali italiane”, a survey compiled by
Mediobanca’s Research Department in conjunction with
the Centro Studi of Unioncamere. In particular, the
study consists of financial information related to 505
companies including companies i) not belonging to
major groups, ii) revenues lower than € 290 million and
headcount lower than 499 in 2004. For comparative
reasons, calculation of the benchmark takes into
account the same period of observation of the
companies included in the sample.

The economic impact of buy out

Private equity backed buy outs became an integral part
of the Italian economy since the mid-90’s, registering
increasing investment amount and representing today
the main part of the industry in line with the European
context.
Employment growth
The number of people employed in private equity
backed buy out companies increased by an average
of 10.7% per year.
The medium enterprises benchmark, indicates an
annual increase of only 0.3%.
The weighted average CAGR of the headcount
(i.e. CAGR calculated by also taking into account the
size of the companies included in the sample) shows a
growth of 7.6%.
Revenues growth
Private equity backed buy out companies increased
revenues by an average of 10.0% per year.
The growth rate is 3 times the one of the medium
enterprises benchmark (3.3%).
The weighted average CAGR of revenues shows a
positive performance as well (9.4% over the period).

The economic impact of venture capital

A similar impact to private equity backed buyouts was
experienced from venture capital investments on the
Italian economy, confirming the positive economic
effects related to the whole activity of investment in risk
capital, indipendently from the type of deals and
regardless of the ecomomic downswing in the period of
analysis.
Employment growth
Venture capital backed companies increased staff
members at a faster rate than companies included
in the medium enterprises benchmark.
In the period under analysis venture capital backed
companies added jobs by an average of 6.5% against a
national employment growth rate of 1.1% and of 0.1%
for the medium enterprises benchmark.
The weighted average CAGR of the headcount
(i.e. CAGR calculated by also taking into account the
size of the companies included in the sample) shows a
growth of 4.3%.
Revenue growth
Collectively, venture capital backed companies
increased their revenue by 24.3%. This was almost 8
times higher than the medium enterprises benchmark
(3.3%).
The weighted average CAGR of revenues amounted to
11.0%.
Revenue increase has been higher for venture backed
companies, than for buy outs.This is mainly due to the
smaller size characterizing such companies and to
higher chances, for private equity players, to help
revenues to increase in new companies than in
considated ones, that have already reached a certain
maturity.

As far as profitability is concerned, the results for
the venture capital backed companies show a
positive growth in EBITDA, compared to the
negative performance from the medium enterprises
benchmark.
The growth rate experienced was 6.0% compared to
the medium enterprises benchmark of -4.1%.
The weighted average CAGR of EBITDA shows a
positive performance as well (1.7% over the period).

Revenue growth in the holding period

In this environment, the contribution to Italian
employment and economic growth from private equity
backed buy out and venture capital companies has
been higher than that of the average medium sized
Italian companies.
In general, private equity backed companies
included in the sample increased their number of
employees at a faster rate than other similar sized
Italian industrial companies.
Over the holding period, the number of people
employed in Italy by private equity backed companies
increased by an average of 8.4% against a national
employment growth rate of 1.1%.
A comparative analysis between the national
employment trend and the headcount CAGR in buy out
and venture capital investments is provided in the chart
below (note that CAGR does not take into account year
on year fluctuations).

Similarly, during the investment period, private
equity backed companies increased EBITDA by a
weighted average of 9.8% (i.e. from € 1.1 billion in
the first year of the investment to € 1.2 billion in the
year of exit).
In conclusion the PE backed companies grew at a faster
rate than other companies, as shown from the higher
performances of the main economic indicators.

The growth is also consistent in the generation of
revenues and EBITDA. Private equity backed
companies (both buy out and venture capital)
included in the sample have raised revenues over
the period analyzed by a weighted average of 17.7%
(from € 8.1 billion in the first year of the investment
to € 10.2 billion in the year of exit).
A comparative analysis between the Italian GDP and the
revenue CAGR in the companies of the sample is
provided in the chart below (note that CAGR does not
take into account year on year fluctuations).

Glossary of terms and abbreviation

Bridge financing
Financing made available to a company in the period of
transition from being privately owned to being publicly
quoted.
Business plan
A document which describes a company’s
management, business concept and goals. It is a vital
tool for any company seeking any type of investment
funding, but is also of great value in clarifying the
underlying position and realities for the
management/owners themselves.
Buyback
A corporation’s repurchase of its own stock or bonds.
CAGR (Compound Annual Growth Rate)
The year-over-year growth rate of an investment over a
specified period of time. The CAGR is a mathematical
formula that provides a “smoothed” rate of return. It is
really a pro forma number that tells you what an
investment yields on an annually compounded basis; it
indicates to investors what they really have at the end of
the investment period. The compound annual growth
rate is calculated by taking the “nth” root of the total
percentage growth rate, where “n” is the number of
years in the period being considered.
Capital gains
If an asset is sold at a higher price than that at which it
was bought, there is a capital gain.
Carried interest
A bonus entitlement accruing to an investment fund’s
management company or individual members of the
fund management team. Carried interest (typically up to
20% of the profits of the fund) becomes payable once
the investors have achieved repayment of their original
investment in the fund plus a defined hurdle rate.
Closing
A closing is reached when a certain amount of money
has been committed to a private equity fund. Several
intermediary closings can occur before the final closing
of a fund is reached.
Corporate Governance
Good practice in the management and governance of
privately held companies in the private equity and
venture capital industry. Their aim is to define principles
of good governance for private equity and venture
capital investing and regarding the conduct as
shareholders and management.

Deal
Private equity house investment.
Deal flow
The number of investment opportunities available to a
private equity house.
Delisting
The removal of a company from listing on an exchange.
Due diligence
For private equity professionals, due diligence can apply
either narrowly to the process of verifying the data
presented in a business plan/sales memorandum, or
broadly to complete the investigation and analytical
process that precedes a commitment to invest.
The purpose is to determine the attractiveness, risks
and issues regarding a transaction with a potential
investee company. Due diligence should enable fund
managers to realise an effective decision process and
optimise the deal terms.
Early stage
Seed and start-up stages of a business.
EBIT (Earning Before Interest and Taxes)
Earnings before interest and taxes – a financial
measurement often used in valuing a company (price
paid expressed as a multiple of EBIT).
EBITDA (Earning Before Interest, Taxes,
Depreciation and Amortization)
Earnings before interest, taxes, depreciation and
amortisation – a financial measurement often used in
valuing a company (price paid expressed as a multiple
of EBITDA).
Equity
Ownership interest in a company, represented by the
shares issued to investors.
Exit
Liquidation of holdings by a private equity fund. Among
the various methods of exiting an investment are: trade
sale; sale by public offering (including IPO); write-offs;
repayment of preference shares/loans; sale to another
venture capitalist; sale to a financial institution.
Expansion capital
Also called development capital. Financing provided for
the growth and expansion of a company, which may or
may not break even or trade profitably. Capital may be
used to: finance increased production capacity; market
or product development; provide additional working
capital.
Fund
A private equity investment fund is a vehicle for
enabling pooled investment by a number of investors in
equity and equity-related securities of companies
(investee companies). These are generally private
companies whose shares are not quoted on any stock
exchange. The fund can take the form either of a
company or of an unincorporated arrangement such as
a limited partnership.
Hands-off
A private equity investment in which the venture
capitalist contributes only capital – and not business
know-how or management involvement – to the
investee company.
Hands-on
A private equity investment in which the venture
capitalist adds value by contributing capital,
management advice and involvement.
IRR (Internal Rate of Return)
The IRR is the interim net return earned by investors
(Limited Partners), from the fund from inception to a
stated date. The IRR is calculated as an annualised
effective compounded rate of return using monthly cash
flows to and from investors, together with the Residual
Value as a terminal cash flow to investors. The IRR is
therefore net, i.e. after deduction of all fees and carried
interest. In cases of captive or semi-captive investment
vehicles without fees or carried interest, the IRR is
adjusted to created a synthetic net return using
assumed fees and carried interest.
Lead investor
Investor who has contributed the majority share in a
private equity joint venture or syndicated deal.
Management Buy In (MBI)
A buy out in which external managers take over the
company. Financing is provided to enable a manager or
group of managers from outside the target company to
buy into the company with the support of private equity
investors.
Management Buy out (MBO)
A buy out in which the target’s management team
acquires an existing product line or business from the
vendor with the support of private equity investors.
Portfolio company
The company or entity into which a private equity fund
invests directly.

Private equity
Private equity provides equity capital to enterprises not
quoted on a stock market. Private equity can be used to
develop new products and technologies, to expand
working capital, to make acquisitions, or to strengthen a
company’s balance sheet. It can also resolve ownership
and management issues. A succession in family-owned
companies, or the buyout and buy-in of a business by
experienced managers may be achieved using private
equity funding. Venture capital is, strictly speaking, a
subset of private equity and refers to equity investments
made for the launch, early development, or expansion of
a business.
Reporting
Reporting practices towards investors. Their aim is
improve transparency, so that investors are better able
to monitor and evaluate the performance of their
investments and to make the asset class more
accessible and comprehensible to new and existing
investors.
Seed stage
Financing provided to research, assess and develop an
initial concept before a business has reached the
start-up phase.
Start up
Financing provided to companies for product
development and initial marketing. Companies may be
in the process of being set up or may have been in
business for a short time, but have not sold their
product commercially.
Target company
The company that the offeror is considering investing in.
In the context of a public-to-private deal this company
will be the listed company that an offeror is considering
investing in with the objective of bringing the company
back into private ownership.
Track record
A private equity management house’s experience,
history and past performance.
Turnaround
Financing made available to an existing business which
has experienced trading difficulties, with a view to
re-establishing prosperity.
Venture backed companies
Companies included in a Venture Capital portfolio of
investment.
Venture capital
Professional equity co-invested with the entrepreneur to
fund an early stage (seed and start-up) or expansion
venture. Offsetting the high risk the investor takes is the
expectation of higher than average return on the
investment.

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