Who are Private Equity Targets?

Based on four Surveys on Italian Manufacturing Firms spanning the 1995–2006 period, we investigate the characteristics of those companies that use internal equity as the only source of capital for financing their positive-NPV investments. Firms that are more likely to make an exclusive and pro-cyclical use of internal equity to finance their investments are mainly located in the North and Centre of Italy and tend to be steadily profitable but not export-oriented, not innovative and R&D spenders. Their prevailing family business model limits the use of external equity and debt, thus favoring the resort to internal equity. The resulting lack of resources for innovation makes it impossible for them to grow and sustain a competitive advantage. This is an economic disgrace as the total value added of sample companies represents 0.75 % of the Italian GDP in 2006. Our claim is that the active involvement of private equity investors would have a multiple, positive impact on them. An explanatory framework is developed in this respect. Stronger policy efforts should thus be directed towards promoting the growth of a private equity market in Italy by removing the barriers that still prevent it from having a positive, real impact on the real economy.