The Impact of Private Equity Ownership on Firm Performance: Evidence from the Italian Manufacturing Sector.

The economic effect of Private Equity (PE) remains a central and contentious topic in corporate finance, especially in distinct institutional contexts like Italy's SME-based economy. We argue that the dominant monolithic understanding of PE ignores important heterogeneity and investigates if PE firms use systematically different value-creating 'playbooks' depending on the size of the target. Using a large-scale panel of over 11,000 Italian manufacturing firms from 2014 to 2023, we employ a robust Difference-in-Differences model to provide causally identified estimates of the economic effect of PE on firms. Our findings empirically demonstrate a strategic duality. For larger targets, PE behaves like a disciplinarian agent, concentrating on finance and intentionally constraining growth in poorly performing firms; while for smaller targets, PE behaves like transformative agent, applying a capital-expanding 'buy-and-build' approach that leads to considerable asset and employment growth, but at the cost of longer term, J-curve-like reduction in short-term profitability. By delineating these two different operational models, this study reconciles contradictory findings on the PE growth-profitability trade-off and provides a finer-grained framework for considering the dual economic impact of PE in the modern economy: as the disciplinarian of large established corporations, and the builder of new corporates from traditional enterprises.