Academic journal article Romanian Journal of European Affairs

Venture Capital and Leveraged Buyout: What Is the Difference in Eastern Europe? - A Cross-Country Panel Data Analysis

Academic journal article Romanian Journal of European Affairs

Venture Capital and Leveraged Buyout: What Is the Difference in Eastern Europe? - A Cross-Country Panel Data Analysis

Article excerpt

(ProQuest: ... denotes formulae omitted.)


The 2008 financial crisis strongly affected the LBO evolution: in 2008, 1 554 million euros were invested in Eastern Europe compared to 2 319 million euros in 2007. Venture capital market has not exceeded 100 million euros per year. As illustrated below, the level of venture capital (seed funding, venture early stage and late stage) in Eastern Europe was much lower than the level of LBO during the whole period analysed. Venture capital investments represented on average 0.013% of the GDP per country compared to 0.04% of the GDP for the leveraged buyout operations. This proportion of VC and LBO investments in the country's GDP is reflected in the average size of investments made in start-ups, which is 1.3 million euros when LBO montages are on average 34.6 million.

Most of the previous studies focused on analysing the determinants of venture capital or separately analysing the determinants of LBOs. Very few studies have tried to use the same methodology to analyse both the VC and the LBO at the same time in order to understand the motivations behind each type of investor. Furthermore, very few studies cover Eastern European countries.

This research tries to complete the literature that compares the phenomenon of venture capital with leveraged buyout. The objective of this paper is to compare the determinants of LBO activity and VC activity in the Eastern European countries. The analysis of panel data used in this paper will include determinants from previous studies (GDP growth, market capitalization, research and development expenditures, interest rates, etc.) as well as new variables such as productivity and the corruption index. At the same time, it is assumed that these activities are influenced by cyclical factors and also by structural factors. Our results confirm existent hypotheses regarding the importance of some macroeconomic determinants on the evolution of LBO activity, respectively on the evolution of venture capital activity. However, in the context of the last crisis new factors emerged important for the LBO and VC market in Eastern Europe such as productivity or corruption.

This study shows that macroeconomic determinants affect LBO investment and venture capital investments differently. In order to estimate a regression on panel data, fixed effect models and random effects models were used. The data used in this study covers the period 2000-2013 and analyses a sample of 8 groups2 of countries from Eastern Europe. It should also be pointed out that the same groupings for East European countries used in our econometric models is also used by the European Venture Capital Association (EVCA) for the same reasons concerning the availability of data.

The paper will be organized as follows: Section 2 will present the differences in terms of investment process for venture capital, respectively for leveraged buying. Section 3 will describe the cyclical and structural macroeconomic variables and will present the main studies that have advanced knowledge about the phenomenon of LBO and venture capital. Section 4 will present the methodology and will describe the equilibrium model of private equity investments and the Hausman specification test which will allow us to compare the consistency of fixed effects models and random effects models. Section 5 explains the results of our econometrical models and Section 6 concludes the research paper and points out several strategic directions that are meant to support the future development of venture capital and leveraged buyout investments in Eastern Europe.


Private equity is a heterogeneous activity. There is a strong distinction between venture capital activity and LBO activity. VC investments are aimed at financing the startups with high growth potential. The objective of LBO operations is to finance transfers of ownership: companies are usually bought, restructured to improve performance and generate more value added and then sold. …

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