CEFE 2015 Central European Conference in Finance and Economics

Understanding Private Equity.

Private Equity Investments in European Union
TOM TOFA1
Technical University of Koice, Faculty of Economics
Slovak Republic

Abstract
The paper deals with Private Equity investments in Europe. The aim of this work is to define Private Equity investments
and analyse Private Equity market in Europe. The introduction contains European definitions of Private Equity capital
and data were obtained from EVCA European Private Equity & Venture Capital Association. In the analytical part,
we focused on development and the current situation of Private Equity investments in European Union. In this paper,
we can see the impact of the crisis development of investments. Analysis showed that average investment size have felt
by half but the number of supported companies have slightly increased.

Key words: Private Equity, European Union

JEL Classification: G23, G34, G24, G32

1 Introduction
Private Equity investments have already appeared in the Roman Empire, but greater expansion was
in 15th century supported by export promotion. The most important part of Private Equity
development happened in 40th years of last century in USA when rich families started to promote
smaller businesses. Modern concept of Private Equity has been created in 1980 in the USA. There
and also in UK Private Equity exists a long time but in continental Europe it started to spread later
(Achleitner, Betzer, Goergen and Hinterramskogler, 2010). After 1983 Private Equity investments
were supported by EVCA - European Private Equity and Venture Capital Association mainly by
management-led start-up funding (Payne, 2011). West European Private Equity investments grew
significantly until 2008 when crisis effects influenced development in Europe. According to
Gavrov and olts (2014), emerging Europe countries including Slovakia, missed applying
systemic tools, used only limited support the establishment of industrial zones and parks and
outdated and underdeveloped infrastructure for innovation.
Currently, there is a development of various interesting business ideas that often evolve into
business plans. These plans often have a chance to be successful, but European Union, despite
many projects by government and universities, still lacks the ideal environment for starting
business, especially Slovakia (Alexandros, 2013). If there is demand for these goods or service,
business plans can be realized through startups. The main target of these companies is not profit
but revenue growth so management must address the issue of financing. One of the possible ways
of expanding this companies are alternative investments through providing equity known as Private
Equity. Private Equity investments finance startups but also mature companies with growth
potential (Payne, 2011). They can change low-performance companies into successful enterprises
1

Ing. Tom tofa, Nmcovej 32, 040 01 Koice, Slovak Republic, tomas.stofa@tuke.sk

CEFE 2015 Central European Conference in Finance and Economics

through capital providing and other activities needed for business development. These companies
represent accelerator of economic growth, innovation and employment in every country (Mura and
Buleca, 2012).

2 Definition of Private Equity

EVCA define Private Equity capital as long-term investment not listed on the stock exchange. This
capital becomes part of own capital and so investor acts as a co-owner. Private Equity capital
support development of company in early and middle stages of the business life cycle. These
companies have usually already created product range and produce turnover but management
inefficiency creates very low profits or even loses (EVCA, 2015). Mainly risk-averse investors
prefer these investments. They, along with capital, have to create company strategy, provide know
how and advices in adoption of high-performance management. To support faster company growth
investors do not get regular yields and the entire profit they realize to gain at the end of investment,
usually by selling company stake on the stock exchange. Investors providing resources do not wish
to fully manage the company but they usually achieve majority stake. Nevertheless, they acquire
important rights including the right of veto and control rights over executive decisions of the
company. This fact can scary companies not to get these investments (Achleitner, Betzer, Goergen
and Hinterramskogler, 2010). In the case of company bankruptcy they also have priority rights to
settle their claims. After investment usually come changes in management, company policy and
strategies.
In context with Private Equity, we have to define Venture Capital. Venture Capital, also known as
risk capital, is part of Private Equity capital used to finance company in development stages of its
life (EVCA, 2015). Venture Capital helps emerging companies to realize their business plan and
allows to create functional business ecosystem. These investments are realized in high-growth
industries and usually represent a minority stake in the company. In some cases it can be the only
possible way of financing company because of low creditworthiness (EVCA, 2007). Venture
Capital investors have to be more active than Private Equity investors because they provide more
advices, connections and strategies during the term of the equity partnership. In Table 1 is
investment classification according to company life cycle stage published by EVCA. The line
between these forms of Private Equity is not determined exactly. Classification of investment can
vary because of different definition of various organizations and authors.
Table 1 Forms of Private Equity
Venture Capital
Seed: The firm has not been yet established, but there is
a need to finance market research and product
development

Private Equity
Growth: often
companies

Start-up: Company has been established but it does not

make profit only revenues

Rescue/turnaround: Rescuing company in troubles

through restructure

Later-stage venture: Company exists a few year and

shows revenue growth

Replacement capital: This capital replaces investments

of other companies

minority

investments

in

mature

Buyout: Private Equity firm acquire a company through

stocks and becomes majority ownership to expand on
new markets
Source: Own processing based on EVCA (2015)

CEFE 2015 Central European Conference in Finance and Economics

Higher risk is associated with higher potential returns when selling the stake in company (Engel,
2002). Private Equity investors do not want to continue in participation with company when Private
Equity agreement ends. At the end of these investments selling company stakes always occurs,
what is the true essence of Private Equity financing. Company makes divestments through:
Initial Public Offering company lists its stocks for the first time on the exchange and Private
Equity investor offers his entire stake for sale,
Repayment of Principal Loans company repay all loans that Private Equity firm provided,
Repayment of Silent Partnership company repay debt to the silent partner, but in the case of
bankruptcy his receivables are repaid as the last one,
Sale of Quoted Equity investor sells stake in the company already listed on exchange, e.g.
after lock-up period,
Sale to Another Private Equity Firm such a sell is very rare because of low liquidity on
Private Equity market,
Sale to Financial Institution these divestment are similar to the previous one with only
difference of other buying company,
Trade Sell sale of company shares to industrial investors,
Write-off company writes down its stake to zero (EVCA, 2015).
Private Equity investments are realized primarily through Private Equity funds (Alexandros, 2013).
There are several reasons for the existence of the Private Equity market. The most important reason
is that companies need capital for innovative purposes and they cannot get funding from public
markets or banks. This market is high-risk and illiquid way of businesses financing. Private Equity
investments is also possible through companies specialized in Private Equity or private persons
commonly known as Business Angel. Mediation of these investments does not include only provide
funding but also help in managing businesses, provision of know-how, mediating relations and
enhancing reputation.According to Engel (2002), Private Equity has positive impact on business
performance by higher growth rates. In addition to this EVCA determined positive impact on
economic growth through following factors:
increased innovation,
increased productivity,
enhanced competitiveness (EVCA, 2007).
All these factors drive the economy in domestic and international level, but the overall impact of
Private Equity on the economic performance has not been yet established.

3 Methodology
Despite the fact Private Equity market was developed mainly in USA and United Kingdom, at the
beginning of this century, Private Equity investments recorded high growth in developed countries
of continental Europe. Especially Western Europe began to be regarded as a promising location for
such an investment (Achleitner, Betzer, Goergen and Hinterramskogler, 2010). On the other side
transition economies are also slowly recovering while they lack expansion of this form of
financing. (Szabo, olts and Herman, 2013). This paper use basic indicators and charts to show
development of Private Equity investment and describe individual elements of Private Equity.
Obtained data from EVCA reflected situation in whole of Europe, so they were edited to represent
only countries of European Union. Data were available only for the time period 2007-2014. These
data should mirror all important Private Equity investments in European Union as a result of unified

CEFE 2015 Central European Conference in Finance and Economics

methodology of investment identification. Very important part of these investments is EU initiative

JEREMIE that encourages new investments in startups.

4 Development of Private Equity investments in Europe

Stable economy and positive expectations encouraged growth of alternative investment that lasted
until 2007. Positive development of Private Equity was due to the excess liquidity in the pre-crisis
period (Seretakis, 2013). The Global Financial Crisis in 2008, started by Lehman Brothers
bankruptcy, leaded to global recession and radical investment slump. This shock that is shown in
Figure 1 significantly affected positive development of Private Equity. Overall Private Equity
investments in 2008 decreased by 23.73% annually. In 2009, it fell down by 54.95% annually and
compared to 2007 by 65.64%. Despite the fact that the crisis has ended its effects persist further.
Lower demand, problems with company financing and distrust in investments make start of
company and development more difficult. There is distrust in the market higher than before the
crisis. It seems situation is not going to return to the original level in short time, but current
development has positive outlook.
80 000 000 000
70 000 000 000
60 000 000 000

50 000 000 000

40 000 000 000
30 000 000 000

20 000 000 000

10 000 000 000
0
2007

2008

2009

Total Venture investments in EUR

2010

2011

2012

2013

2014

Total Private Equity investments in EUR

Figure 1 Development of Private Equity and Venture Capital investment volume in EU

Source: Own processing based on EVCA (2015)

High investment growth and impact of the financial crisis led to creation of regulation of alternative
investments in Europe, also known as Alternative Investment Fund Managers Directive. Crisis
effects have appeared in Europe in the second half of the 2008 year and significant fall in
investments continued until 2009. Figure 2 shows cumulated volumes of given Private Equity
investment forms. That means volume of one Private Equity investment form is difference between
cumulated volume of this investment form and previous cumulated volume. Buyout line presents
overall Private Equity investment. Buyouts represent biggest, most fluctuated and most reactive
part of Private Equity capital. Although overall Private Equity investments in 2008 have decreased
Venture Capital investments increased by 4.96%. The most important part of this growth were seed
and growth capital investments growing by 35.52%, respectively by 54.85%. Accordingly, it points
out that Europe believed that it can avoid the serious consequences of the crisis. The next year the
only growing parts were rescuing and replacement capital to rescue companies before bankruptcy
and to boost economy.

CEFE 2015 Central European Conference in Finance and Economics

80 000 000 000

70 000 000 000

60 000 000 000

Buyout
Replacement capital

50 000 000 000

Rescue/Turnaround
40 000 000 000

Growth

30 000 000 000

Later stage venture

Start-up

20 000 000 000

Seed
10 000 000 000
0
2007 2008 2009 2010 2011 2012 2013 2014

Figure 2 Development of cumulated volumes of given Private Equity investment forms in EU

Source: Own processing based on EVCA (2015)

On the other side in Figure 3 we observe that number of supported companies is not as volatile as
investments volume. Compared to 2007 overall Private Equity investments have decreased by
48%, but number of companies have remained roughly unchanged. Fluctuation in 2008 is caused
by relative high number of seed companies and by increase in start-up, later stage venture and
growth companies. It looks like the problem is not demand decrease but distrust of investors.
Coefficient of variation is for number of investments only 5.65% but size of investment shows
variation at level 30.07%. This indicates that during recession investors try to invest but only
limited amount of money. Number and size of investment also have a positive correlation on the
level of 31.24% indicating weak correlation.
6 000
5 000
4 000

Number of companies
financed by Venture
Capital

3 000

Number of companies
financed by Private
Equity

2 000

1 000
2007 2008 2009 2010 2011 2012 2013 2014

Figure 3 Development of count of Private Equity investments in EU

Source: Own processing based on EVCA (2015)

CEFE 2015 Central European Conference in Finance and Economics

Figure 4 shows development of average size of Venture Capital and Private Equity investments.
Before crisis in 2007, the average Private Equity investments were at almost 14 mil. EUR and
Venture Capital investments at 1.8 mil. EUR. The crisis started sharp drop of average investment
size. During two years average Private Equity investment size fell by 66.36%. After critical year
2009 the next development reflects the partial recovery in economic performance. In 2014, Private
Equity investments were lower by 38.47% and Venture Capital investments by 48.09% compared
with 2007. Last three years were relatively stable in investments development, with moderate
growth recorded.
16 000 000,00

14 000 000,00
12 000 000,00
10 000 000,00
8 000 000,00
6 000 000,00

4 000 000,00
2 000 000,00
2007

2008

2009

Average Venture Investment

2010

2011

2012

2013

2014

Average Private Equity investment

Figure 4 Development of average volume of Private Equity and Venture Capital investment in EU
Source: Own processing based on EVCA (2015)

5 Conclusion
The idea was to provide the reader information about alternative way of financing company through
Private Equity and to show development of these investments in European Union.
Private equity investments were at highest point before crisis which strongly affected behavior of
investors. Because of risks and uncertainties, total amount of investments have decreased. Current
economic situation influences every form of Private Equity investments, especially Buyouts, which
represent biggest and most important part. Policy efforts to restore economy did not returned risk
and development investments to its original level and now investors prefers less risky ways of
investing their free funds, although Private Equity market slowly recovers.
Limited amount of investors did not influenced Private Equity demand, which remained relative
stable during crisis. Because of decrease of total amount of Private Equity investments and stable
demand, average size of investment has halved. The simultaneous growth of supply and demand
causes the level of the average investment is renewed very slowly. Nevertheless, it is expected
growth of these investments, despite economic stagnation.

CEFE 2015 Central European Conference in Finance and Economics

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