Private Equity Governance and Financing Decisions

This paper empirically analyzes the financing and governing behavior employed by private equity (PE) investors to manage risks, asymmetric information, and agency problems. In particular, the paper empirically analyzes the actual financial and governing mechanisms employed by the 78% of private equity investors in Italy (over the 1999-2006 period) in order to manage the underlying investment risks involved in each transaction and to minimize asymmetric information and agency costs. This study devotes a special focus on actual contracts signed by private equity funds in order to empirically evaluate how venture capitalists affect the governance of their portfolio companies within the Italian private equity market, which has shown a dramatic growth over the last ten years. With reference to the Italian market, very few studies, if any, have empirically analyzed the impact of PE activity on corporate governance and financing behavior. The limited empirical evidence within the venture governance area is due to lack of public data on PE deal structure. This paper aims at filling this gap through the adoption of a novel and new hand-collected dataset characterized by 162 private equity transactions carried out in Italy over the period from 1999-2006. This study explores the financing and contracting behavior of private equity investors by looking at the actual venture capital contracts and deal terms.