This paper adds to the literature on the determinants of the effects of private equity (PE) investments. Using an original dataset of 191 target firms in Italy, we study the effects on performance and governance of the stakes acquired by the PE investor. We employ a difference-in-differences approach and compare target and control firms sharing similar characteristics and performance in the years preceding the deal. We find that PE investment has a positive effect on profitability, sales, and employment; these effects are larger for minority investments. We argue that this signals effective governance that follows from complementing rather than substituting incumbent managers in minority investments

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Valuation of a distressed company is a very tricky issue, for which many approaches and methods have been provided by the literature. Unfortunately, many of the more suitable proposals from a theoretical point of view (i.e., those based on option pricing theory, and even integrated with game theory) are very difficult to apply to real cases. To face the many contingencies emerging in a real case valuation, a scenario discounted cash flow (SDCF) model is provided here. The focus is on companies at an advanced stage of distress, where their ability to operate as a going concern is in question, and maintenance or recovery of business continuity requires significant interventions in the firm’s strategic, operational, and financial structure. In this context, SDCF, with a number of arrangements elaborated here, appears useful for valuing assets, debt, and equity – from current or potential new investors – and the interactions between them, which are particularly critical for distressed companies. At the same time, SDCF takes into account the firm’s liquidation option, not only at the valuation date but even after a restructuring plan has been launched. The going-concern value including the liquidation option should be the reference point for judging the suitability of business continuity compared to liquidation. In presenting the model, the key concepts and methodology adopted are set out following a numerical example inspired by a real case.

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