Determinants and effects of Venture Capital and Private Equity ...

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1. Introduction In the few last decades there has been an increasing emphasis on the dynamism of small medium enterprises (SMEs), as a major source for speeding up the economic path which coupled with a greater focus placed upon the efficiency of financial markets in meeting the needs of these businesses. In the specific case of Italy, whose economy has always taken advantage of the wealth produced by the industrial districts, this interest should be particularly binding. On the one hand, several studies have shown that small‐medium enterprises count for a product innovation rate more than proportional in regard of R&D formal activities, what explains their high development rates. In particular this is true for high‐tech and industrial enterprises (Audretsch, Santarelli and Vivarelli 1999). Moreover, Thurik et al. (2002) show that, as for 18 OECD countries, higher level of entrepreneurship comes with higher rate of growth and lower unemployment. Furthermore, studies on regional development are in favour of young and small firms devoted to innovative business as the leading components in the economic growth of those areas 1 . On the other hand, the availability and cost of finance is one of the factors which affect the ability of a business to grow. Carpeter and Petersen (2002a) showed that in a panel of more than 1,600 US small firms, the growth of most of them is constrained by internal finance, together with a small leverage effect. In contrast, the small fraction of firms that make heavy use of new share issues exhibits growth rates far above what can be supported by internal finance. In particular, the phase which separates the identification of the innovative project from the marketing of the product appears to be crucial. In part because they do not have the financial and other resources to withstand a sustained period of poor performance, the rate of disbandment among small organizations is quite high, so that a potential investor might see the prospected returns reset to zero as a likely outcome. Accordingly, when looking for external capitals a small business may be exposed to the rationing of funds because it lacks of a long track record, a fact that makes the evaluation more difficult. From the perspective of a new entrepreneur, venture capitalists (VC), acting as professional investors with a deep knowledge of the market based on former managerial experience, are often the only available source of financing to start up a company, especially in those cases where intangible assets are at the core of the business. Additionally, their involvement usually implies sharp changes to both corporate governance models and relations with stakeholders, factors which are perceived as basic starting points for better future performance (Hellmann and Puri, 2002); the latter are common features shared with private equity firms (PE) which 1 As for United Kingdom refer to Hart, Hanvey, (1995). Callejon and Segarra (1999), point out a positive relation between start‐up and the growth of Spanish regions and industries. - 2 -
serve larger established companies in need of either consolidating the results or solving ownership succession’s problems. Empirical evidence for the United States highlights some common factors of the VC and PE industry: the financing is mainly directed to smaller firms operating in high‐tech sectors whose performance is significantly different from that of similar firms which did not receive this form of financing. Differences in performance pertain to many aspects, such as R&D intensity, firm sales growth and investment which have been found to be generally higher for backed firms than others. However, when looking at the European market it is clear that it differs from the North American one for some substantial aspects. A much larger market size, a more developed capital market, different composition of the investments – generally more prone to start‐up and high‐tech firms – and of financial sources – pension funds constitute a larger share in United States while the main contribution in Europe comes from banks – are the most important differences to enumerate. Given the differences in the industry characteristics it might be assumed that determinants and effects of VC and PE may differ in the European countries. The first aim of this study is to advance knowledge of the Italian market of SMEs financing and to contrast the results with other experiences. In order to obtain this result we use a database in which information on venture capital and private equity deals has been matched with balance‐sheet data for a representative sample of backed Italian firms (data are picked‐up from the Private Equity Monitor yearly newsletters, AIDA and ZEPHIR – Bureau Van Dijk). More specifically, the empirical exercises use probit regression analysis to test the relation between the probability of VC and PE deals and a group of variables (such as size, age, level of collateral, etc.) found to be relevant in the US. The empirical analysis also compares the performance – in terms of various balance‐sheet indicators – of backed firms with that of non backed ones. We applied fixed effect estimation, which controls for unobservable heterogeneity, in order to explore these relations. The ex‐post analysis of the performance is also useful to discriminate among different theories. One of these theories consists in the prediction of the so‐called “certification effect”, in terms of ability of third‐parties to certify the quality of information issued by relatively unknown firms (Megginson and Weiss, 1991). The latter notion has been tested and evaluated in many different bodies of research. Borisova (2007) applied it to the privatization process which has characterized the European countries during the three last decades, finding that a decrease in government ownership by one percentage point leads to an increase in the credit spread, used as a proxy for the cost of debt, by one‐half of a basis point. Sufi (2006) analyzed another context, namely the introduction of syndicated bank loan ratings by Moody’s and Standard & Poor’s showing that borrowers that obtain a loan rating gain increased access to the capital of less informed investors such as foreign banks and non‐banks institutional investors. - 3 -
Page 1: Determinants and effects of Venture
Page 5 and 6: 2. SMEs challenging the financial i
Page 7 and 8: after a merger operation, the porti
Page 9 and 10: that when size of projects becomes
Page 11 and 12: contact between the lead investor a
Page 13 and 14: asymmetric information. On this top
Page 15 and 16: These first arguments already provi
Page 17 and 18: case of turn‐around or buy‐out
Page 19 and 20: described in section 4.1. Finally,
Page 21 and 22: sufficient financial data in the da
Page 23 and 24: equity is 9 per cent; the median ad
Page 25 and 26: Finally, we find Short Debt being n
Page 27 and 28: period of investment and growth. On
Page 29 and 30: An overview of the Sample 50 40 30
Page 31 and 32: Variable Number of Obs. - 31 - Tabl
Page 33 and 34: - 33 -
Page 35 and 36: Variable Age Size Age 1.000 Size 0.
Page 37 and 38: References Aghion P., Bolton P., (1
Page 39 and 40: Gompers P.A., (1995). Optimal stagi
Page 41: Stein J.C., (2002). Information pro

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