Academic journal article Romanian Journal of European Affairs

The Future of Private Equity in Europe - the Determinants across Countries

Academic journal article Romanian Journal of European Affairs

The Future of Private Equity in Europe - the Determinants across Countries

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

This article tries to answer to the following questions: How the recent crisis impacted the evolution of Private Equity in Europe? and What are the factors affecting the evolution of private equity investments in Europe?

Europe is the second largest private equity market worldwide after United States. In 2013, total private equity investments amounted to 35.7 billion euros which represents a drop of 49% compared to pre-crisis levels. This drop was mainly in relation to the austerity measures taken by European governments in order to respond to the sovereign debt crisis. However, in the last years we have seen that private equity investments began to slightly revive in Europe but modest and well below pre-crisis levels.

The objective of this research is to identify and analyse the main factors affecting the evolution of private equity in Europe. It should be noted that the literature is not exhaustive in terms of identifying the determinants of private equity market. However, some studies managed to identify and validate macroeconomic variables such as the GDP growth, the market capitalization, the R&D expenditure, the interest rates, etc. as drivers for the private equity market. In general, the literature studies the phenomenon of venture capital which targets the investments in start-ups and is a subcomponent of the private equity investments.

The papers which are more relevant for this study, both in terms of model and methodology, are the following: Gompers and Lerner 1998, Jeng and Wells 2000, Romain and de La Potteria 2004, Félix 2007.

Gompers and Lerner (1998) study the development of venture capital activity in U.S. taking into account the period 1969 - 1994. The main variables studied were: the number of IPOs, the economic growth (expressed as GDP growth in real terms) and the shortterm interest rate (expressed as the yield of U.S. Treasury securities). Gompers and Lerner (1998) confirm the positive effect of the economic growth on the evolution of venture capital in U.S. Both authors also confirm statistically the negative relationship between the venture capital and the short-term interest rate. However, Gompers and Lerner (1998) failed to statistically validate a relationship between the number of IPOs and the funds raised for the venture capital investments.

In another similar study, Gompers and Lerner (1998) tested and validated a correlation between the US Government expenditure in R&D and the evolution of venture capital investments. This variable was validated by the econometric model as significant with a positive impact on the venture capital investments.

Jeng and Wells (2000) studied the evolution of venture capital investments in 21 countries during 1986 and 1995. Both authors analysed the determinants of venture capital such as market capitalization, number of IPOs, economic growth (expressed as GDP growth in real terms), labour market rigidity, value of pension funds and the level of taxation on capital gains.

The possibility of having access to IPO divestments is considered by both authors as the most important factor for an private equity investment fund when deciding to raise money for the venture capital investments. However, Jeng and Wells (2000) failed in their analysis to validate a significant correlation between the evolution of venture capital investments and the following variables: economic growth, market capitalization and tax on capital gains.

Romain and de La Potteria (2004) continues to study the determinants of venture capital for a sample of 16 OECD countries during the period 1990 - 2000. The main variables used in their econometric model are: economic growth rate (expressed as GDP growth in real terms), long-term interest rate, short-term interest rate, economic growth rate, level of R&D spending, number of patents filed, labour market rigidity and entrepreneurial activity. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.