Working paper on the real effects of private equity investment, by the ECBp

Recent years have spurred interest in the role of private equity investment in the financing of small new firms. While banks are often reluctant to finance such firms because of high uncertainty, information asymmetry, and agency costs, private equity investors are specialised to overcome these problems through the use of staged financing, private contracting and active monitoring. These unique features make them more likely to finance early stage and technology companies than banks. This paper investigates the previously unexplored effect that private equity investments have on new business creation in Europe.