Private Equity and Mid Cap: Twenty Years of History
The Numbers Underlying the Analysis
The analysis concerned 319 Italian medium-sized manufacturing companies in which funds and other financial investors entered during the period from 2001 to 2021. 82.1% of the transactions involved closed-end Private Equity funds, while in 9.4% of cases it was an investment holding company. The remaining part involved operators of various kinds, including club deals and family offices.
As for the type of operation: in 62% of cases these were buy-outs (majority acquisitions, using financial leverage); in 31% expansion interventions (equity contributions for the growth of already established companies); the remaining cases are divided between 4% replacement (replacement of minority shareholders) and 3% turnaround (restructuring of companies in difficulty).
From the point of view of motivations, almost nine out of ten transactions concerned direct entry into private companies, often of family origin.
In terms of geographical location in Italy, 60% of the transactions were located in the three regions with the strongest manufacturing vocation: Lombardy, home to 29% of the invested companies, Emilia-Romagna (16%) and Veneto (15%). This is followed by Piedmont, with 12% of the transactions and Tuscany (9%). At sector level, 45% of the target companies operate in the production of industrial goods (B2B), 55% in consumer goods (B2C).
The size of the target companies underlying the analysis also varies with the nature of the investor. Private Equity funds have favoured targets with an average turnover of 55 million; club deals and family offices have a more limited range of interest, between 30 and 40 million in turnover; while the intervention of sovereign funds is oriented towards companies with sales exceeding 100 million euros.
The Contribution of Private Equity Emerging from the Analysis
The profile of the target companies is characterised by three distinctive features: high margins, low indebtedness and a strong international vocation. In the period immediately preceding the fund’s entry, the selected target companies showed an average EBITDA margin of 12.7% (compared to 8.5% for non-investee companies), a PFN/EBITDA ratio of less than 1.5 (compared to 3x for the control sample) and export weight on turnover of 48.5%, significantly higher than the 43% of non-invested companies.
The analysis shows that in the two years following the entry, the financial investor (Private Equity) gives turnover an average cumulative growth of 25%, which almost triples the +9.2% turnover of companies with similar characteristics but which were not the subject of Private Equity investment.
With reference, however, to the PFN/EBITDA ratio, this has increased due to the increase in PFN. The latter reflects the typical structure of leveraged buyouts; nevertheless, the average (2.4x) and median (2.2x) PFN/EBITDA ratios recorded in the second year post-investment remain well below the threshold commonly considered sustainable (3x), highlighting how the Private Equity sector in Italy has historically adopted a prudent use of financial leverage.
Growth is not only commercial, but also involves the employment base with potential positive effects on the communities surrounding the invested companies. The number of employees increases by 17.6%, a very significant gap compared to the +1.3% of the control sample.
Finally, total assets also experience exponential growth, with +81.9% in the two-year period, which is almost six times higher than the, albeit significant, growth of +13.8% recorded by non-target companies. This is clearly the result of an intense investment campaign aimed at equipping the target company with assets consistent with its growth path.
Conclusion of the Analysis
The picture that emerges is that of a Private Equity sector capable of supporting Italian companies during times of transformation, guiding them towards new managerial and industrial dimensions without compromising financial balance. A story that, over the past twenty years, has helped to redesign the map of Mid Caps and which seems destined to continue, in view of the growing interest from investors, especially international ones.
The role of M&A, therefore, represents a primary driver of growth for Mid Caps.
LDP Tax&Law helps mid-cap companies and supports growth
LDP, with its multidisciplinary team of professionals (Tax, Legal, Corporate Finance), operates in support of companies (Small Cap and Mid Cap) in the choice and management of extraordinary finance operations and specialises in providing consultancy services in operations of: M&A, Equity Capital Markets, Debt Advisory, Valuation Services.
With its experience in such transactions, it assists companies, groups and investors in every phase of implementation and strategic success, and is able to manage all stages of the M&A transaction.
It seeks institutional investors to finance corporate development projects or for sale or leverage operations by connecting target companies with leading market operators such as both Italian and foreign Private Equity and Venture Capital funds; presents investment opportunities to financial operators, and supports subsequent economic and financial analyses. Provides support to financial operators in disposal operations through broad competitive processes. Assists company managers in structuring the transaction and selecting institutional investors in equity and debt capital.
Micro-Pills and Definitions in the Field of Corporate Finance
Below are some terms that are often used by advisors and counterparties in M&A and Valuation operations and mentioned in the previous paragraphs, such as: closed-end fund, investment holding, club deal and family office.
Closed-end fund: means a collective investment fund with a fixed number of shares, in which the right of redemption is granted to participants only at predetermined dates. To exit a closed-end fund at times other than those provided for, the investor must sell their participation to third parties.
Investment holding: is a company established to hold and manage equity interests in other companies and investments, with the aim of obtaining income from dividends and capital gains, diversifying the portfolio, optimising the tax and financial management of the group and protecting assets.
Club Deal: is a form of investment that allows a group of private investors to join together to finance a single company. It is part of the equity world, as investors acquire shares in the share capital of the target company.
Family Office: is a company that offers a professional service for the management and coordination of family assets, focusing on the protection of wealth, its expansion and its transmission across generations. It manages assets by acting as a coordination centre for the financial and administrative management of families.
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