The case for private equity

There has been a long discussion on how Italian small and medium companies can strengthen, grow and aggregate in order to be more competitive on the international economic scene. For some time, one of the possible solutions has been the opening of capital of private equity funds.
As we know, private equity is a tool which, if "handled" well, allows Italian SMBs to increase their equity by capital additions and at the same time accompany their growth.
There are three feasible methods for creating value in private equity operations: leverage of multipliers (buy at X price times EBITDA and sell at X+n times EBITDA) which takes advantage of market periods that are favorable for buying/selling and information asymmetries between buyer and seller; leverage (value is created by taking advantage of the target company's ability to take a debt and the successive reimbursement); performance improvement leverage (value is created by working on efficiency and increasing the level of the EBITDA).
If only a short time ago value was created primarily by the utilization of leverage, today investors are obliged to intervene primarily with performance improvement leverage, with important consequences for the investor team's approach. From a study carried out by the private equity laboratory and LBOs, it emerges that SMBs are willing to accept private equity funds in their social system which prove to be competent not only from the financial point of view, but particularly in terms of industry and operations. The study carried out in 2010 on 70 sample SMBs shows that reputation and basic networks, the possibility to access credit canals, and knowledge of the given market are elements which favorably impact the choice to open capital. The ability to support an internationalization process is also a particularly positive factor according to those interviewed.
However there are some critical points which impede the entry of the fund into companies: loss of control and difficulty in managing governance are the most crucial aspects to be dealt with during the investment phase.
After all, in 2009 the Italian market, which has always been focused on small and mid market segments, concentrated even more on deals with small-medium companies: 66% of operations which the private equity laboratory and LBO conducted a census on, included companies whose turnover was less than 50 million euro, against 50% registered in 2008 and 46% in 2007.
Interesting considerations can also be advanced on the front of prices which in the given sector are expressed by the relationship between Enterprise value (Ev), or rather the market value of capital invested and the gross operating margin (GOM or EBITDA).
Even if it settles itself on slightly lower levels, the average Ev/Ebitda multiple of the SMB segment follows the overall market trend, which saw a drop of 7.4% compared to 2008.Prices have registered the following trend: 8.2 times the EBITDA in 2006, 7.1 times in 2007, 6.3 times in 2008 and 6.0 times in 2009.
The average prices of LBO operations are instead structurally inferior compared to the multiples of the entire market (8 - 15% less from 2007 to 2009). Furthermore, inside the SMB sector higher prices paid in favor of financial operations of growth (expansion) are revealed through an increase in capital (respectively 13%, 16% and 87% compared to the average LBO multiple of 2007, 2008 and 2009). Despite the financial crisis, investors recognize (and repay in prices) fine opportunities for growth in Italian SMBs.
Despite the general drop in prices of several operations, some very interesting prices have been noted: this occurs only in well-organized companies with higher than average results, working in strong and stable sectors.
There is certainly no lack of market potential: an update of a recent study conducted by the Private Equity Lab and LBO, carried out on over a million companies, indicates about 1,590 potential targets, 78% of which are depicted as SMBs.