Explaining Returns in Private Equity Investments

Posted: 8 May 2010

See all articles by Stefano Caselli

Stefano Caselli

Bocconi University - Department of Finance

Emilia Garcia-Appendini

University of Zurich - Department of Banking and Finance

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 22, 2009

Abstract

Exploiting a unique opportunity offered by the Italian private equity (PE) market, we examine the hitherto largely unexplored internal rate of return (IRR) of PE investments. Our database covers the entire universe of transactions sponsored by Italian PE investors in Italy up to 2007 and offers rarely accessible information about IRR, covenants and governance at the investment level. We show that IRR is mainly driven by growth in sales, ROA and ROE of the invested firm. IRR also depends on how contractual covenants distribute cash-flows between different classes of investors. For the same level of firm growth, IRR increases when covenants distribute cash-flows more than proportionally to PE investors. We then explore the determinants of growth of invested firms. Growth depends on the intensity of monitoring by PE investors, on firm characteristics and on the incentive alignment effect of contractual covenants, which ultimately affect the quality of firm governance.

Keywords: Private equity, venture capital, internal rate of return, covenants

JEL Classification: G11, G23, G24

Suggested Citation

Caselli, Stefano and Garcia-Appendini, Emilia and Ippolito, Filippo, Explaining Returns in Private Equity Investments (October 22, 2009). CAREFIN Research Paper No. 15/09, Available at SSRN: https://ssrn.com/abstract=1600227

Stefano Caselli (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Emilia Garcia-Appendini

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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