This study investigates the impact of excessive regulation on private equity (PE) returns and firm performance. History shows that extreme regulation and prohibition reduce the supply of capital and raise returns (e.g., as with drugs and diamonds). However, for value-added investors such as PE funds, extreme regulation also reduces the quality of capital and fund involvement. The net effect on returns is therefore ambiguous and heretofore not studied. With a new unique dataset, this paper empirically examines the performance of PE investments in Italy when leveraged buyouts are strictly regulated. The data show that extreme regulation reduces not only the supply of capital, but also PE returns and firm performance, as well as the likelihood of an IPO exit.