Private Capital in Southern Europe: Italy

Italy has endured a torrid decade, suffering three recessions since 2008, with high levels of public debt, unemployment at above 10 per cent and a banking system lumbered with bad loans. Its political leadership has also drifted towards populism, with talk of a referendum to withdraw from the Euro currency, and a toughening anti-immigration stance.

Illustration by Costas Mantzalos

Hard economic times tend to lead to a hardening of borders, with a zero-sum ‘us-and-them’ mentality. To counter the trend and support greater mobility of capital and people in the Mediterranean, a vibrant private sector is crucial for Italy’s future.

In the previous two newsletters, I explored cross-border private capital flows in France and Spain, identifying firms, notably in private equity (PE), who were building a pan-Mediterranean investment portfolio and looking at what was driving them. Italy is a far smaller market, and more introspective. Yet its total deal value has climbed every year between 2012 and 2016, reaching a record €14.3 billion. The value of deals fell by almost half in 2017, but the market has since had a resurgence. With firms deploying larger sums into bigger deals, confidence seems to be rising.

Digitalisation to disrupt Italian finance, finally

In value terms, much of the recent activity has been channelled towards financial services, as investors acquire non-performing loans (NPLs) and distressed assets at mark-down prices. According to research company Unquote, PE firms including Idea Capital, HIG and AnaCap have all raised money for forays into Italian NPLs. Funds hope for strong growth as the sector bottoms out, and digitisation promises to at last disrupt Italian finance. The country has much further to go in its embrace of the digital realm; data from the International Telecommunications Union (ITU) shows that only 61 per cent of the population uses internet services, compared to 86 per cent in France and 81 per cent in Spain. 

In Italy, inbound M&A (including PE) has accounted for a third of the deal count, and half of the disclosed deal value, of overall activity since 2012. In private equity, Italy is receiving growing attention from transatlantic and pan-European funds, regardless of whether they have an Italian office. Nine of the ten largest deals last year involved either a global or European PE house.

Abundant PE opportunities in family-owned SME

One factor supporting international interest is the abundance of Italian SMEs, producing high-quality products in sectors as diverse as fashion and engineering. Their craftsmanship and class is world-renowned. And over 60 per cent of those businesses are still managed by family members, making them ideal targets for PE. From their perspective, the investment can help professionalise their companies or allow them to gain scale in overseas markets.

For examples, look to the food industry. Half of the biggest deals of 2017 targeted the consumer industry, as PE funds sought to take Italian brands international. One example was the purchase of Italian sandwich chain La Piadineria by the London-based Permira. Under the previous ownership of Taste of Italy, an Italian fund specialising in food investments, the business tripled its annual turnover and expanded to France. Permira plans further European rollouts.

For other Italian businesses whose hegemons are approaching retirement, new ownership can also provide a route towards succession. Take the Nobili family-owned IRCA Group, a producer of ice cream, pastry and baking products. It was acquired by the US-headquartered Carlyle Group last year, in a secondary buyout from Ardian. According to Unquote, the brothers who ran the business used the investment to step back from the company.

Loosening of regulation will further encourage investors

Foreign interest has also been fanned by recent regulatory measures. One change allows for carried interest – the money paid to PE firms when return hurdle rates are cleared – to be taxed at the capital gains tax rate of 23 per cent, rather than the personal income tax rate of up to 46 per cent. PE houses are no longer restricted to financing their Italian deals from domestic banks. And they have found strong appetite from investors in Italy: fundraising in the country soared from €1.3 billion in 2016 to €5 billion last year, partly thanks to the introduction of personal savings accounts, whose assets can be invested in PE.

For now, buyer interest and valuation remain robust despite political and economic insecurity. Foreign PE investors are generally looking to take Italian brands global, rather than targeting the domestic market. But whether the mood will dampen as Italy’s political situation unfolds, we will have to wait and see.

Private capital is a good marker of the real integration taking place between the economies of the Mediterranean, as compared to trade flows or equities, which can be volatile, short-term or reflective of other headwinds in the global economy. Investing in companies is a medium- to long-term engagement, even in the case of PE, requiring deep knowledge of a country’s future potential. Italy remains a far smaller PE market than France and Spain, and as an economy, it has been the weakest of the three. But its commercial niches, from fashion to brands to food, could be comparative advantages for investors seeking to access growth opportunities in the Mediterranean region.

Cleopatra Kitti was in conversation with Adam Green