Private Equity Governance and Financing Decisions

Abstract

This article focuses on the structure, governance, and performance of leveraged buyouts in Italy. It defines the term “private equity” as an expansion financing of existing firms. It notes that Italy has previously experienced periods of exhausting regulation over such transactions. The discussion analyzes the governing and financing behavior used by private equity investors in order to manage investment risks and related agency problems. From there it turns to a study of how venture capitalists affect the governance of their portfolio companies within the private equity market of Italy.

‘If the Facts Don't Fit the Theory … ’: The Security Design Puzzle in Venture Finance

“…Consistent with the Canadian evidence, the empirical studies in Germany (Basha and Walz 510 S. Zambelli 2007 12 ;Hartmann-Wendels et al 2011), Finland (Parhankangas et al 2005, Italy (Zambelli 2012), Sweden (Isaksson et al 2004), Europe (Cumming 2008;Cumming and Johan 2008b;Schwienbacher 2008), Estonia (Kõomägi and Sander 2006) and developing countries (Lerner and Schoar 2005) show that convertible securities are not the most commonly used securities in venture finance. Outside the US, a larger set of financial securities is adopted by VCs similarly to what occurs in Canada (Cumming 2001(Cumming , 2002(Cumming , 2005a(Cumming ,b,c, 2006(Cumming , 2007.…”

“…Bengtsson ), Canada (e.g. Cumming ), Germany (Bienz and Walz ), Italy (Zambelli ), Sweden (Isaksson et al . ) and Europe (e.g.…”

“…It could be interesting to compare the VC financing behaviour in other bank‐oriented countries (such as Germany and Italy). The studies of Cumming and Zambelli () and Zambelli () represent a first step towards this direction and show that, in Italy, convertible securities are not most commonly used, and VCs use a wide set of securities instead. More empirical studies are warranted in this area.…”

“…Common stocks provide the holders with control rights, voting rights, as well as pre-emptive rights if the company intends to issue new shares in the future. In this case, shareholders have the right to acquire a certain percentage of the new shares in 4 See Zambelli (2012) for a comprehensive review of the risk mitigation mechanisms employed by VCs. 5 For a literature review on VC financial contracting, see Roberts and Sufi (2009). Security Design Puzzle in Venture Finance 503 order to keep their ownership stake proportional.…”

“…Bengtsson 2012), Canada (e.g. Cumming 2012), Germany (Bienz and Walz 2010), Italy (Zambelli 2012), Sweden (Isaksson et al 2004) and Europe (e.g. Cumming 2008) show that VCs demand various cash flow and control rights, as well as protective provisions or negative covenants (Bengtsson 2011).…”