Explaining Returns in Private Equity Investments

We examine a unique hand-collected database of private equity deals which covers the entire universe of transactions sponsored by Italian private equity investors in Italy in the period 1999-2007. The database offers rare information about the internal rate of return (IRR), covenants, leverage, industry of each deal, as well as information about the changes in governance in receiving firms and characteristics of sponsor funds. We find that most of the PE-backed firms are privately held, established firms searching for an expansion, with only a small minority at an early stage looking for venture capital. We also find that the average investment is smaller and has a shorter duration than the PE deals done in the US or the UK, exits primarily through a trade sale rather than an IPO, and is managed in a large number of cases by banks or financial institutions. We also provide new evidence of previously unexplored relationships between firm, fund, and contract characteristics and the resulting IRR of Continental European PE deals: the IRR is positively related to the initial undervaluation, the risk of the target firm, the experience o