Where subordinated spells success

Equita is poised to raise a second private debt fund later in the year. Head of private debt, Paolo Pendenza, says the firm will be targeting unitranche and subordinated PIK

Could you provide a brief history of Equita?

Equita was formed in the mid-1970s as a stock brokerage firm owned by banks. It was sold to private equity firm JC Flowers through a management buyout and was owned by the firm from 2007 to 2015. Equita expanded into investment banking in 2007 and 40 percent of its revenues now come from investment banking. JC Flowers exited in 2015 and management bought back their 51 percent stake. So it was 100 percent-owned by management until late 2017, when it went public. Equita is currently the largest independent investment bank in Italy.

How did your debut private debt fund come about?

Between 2012 and 2013 there was a regulatory change in Italy which removed a number of obstacles preventing SMEs from issuing bonds, thereby creating a favourable environment for the birth of the private debt industry.

Equita had already been thinking about the growth of its alternative asset management business and called me with a view to launching a private debt fund.

Structuring the fund and getting LPs interested took a while but we had important backing from Fondo Italiano Investimento, the fund of funds. We had a first close on the fund on €66 million and started investing. We then continued fundraising for a further one and a half years and did a final close in late 2017 on €100 million.

The investor base was mainly Italian banks, insurance companies and family offices. Equita itself was also an investor. Fifty six percent of the fund was invested in 2018 alone, and we have now made nine investments in total, with eight still in the portfolio.

What was the strategy for Fund I? 

The fund mainly backs private equity deals in Italy. It was set up to cover senior, subordinated and minority equity. However, today we see the opportunity as being clearly lower in the capital structure, unitranche and subordinated PIK. It’s a great opportunity as the subordinated market in Italy is very valuable and there is little competition. The banks don’t look at it and non-Italian institutions don’t really come to Italy for €10 million-€15 million tickets.

We are closing our 10th deal at the end of February and that will make Fund I 91 percent invested. We will end up deploying the fund in around three years, which was what we aimed for. We look at ourselves more as an alternative to equity than bank finance.

What’s the position now with regard to fundraising? 

We need more capital, but first we need to create our own management company, which we are filing with the Bank of Italy and which can take five to seven months. So we would anticipate officially launching a second fund around July to September of this year. Before then, we will be having discussions with potential investors, including investors from outside Italy. We did not use a placement agent for our first fund but we will do so this time in order to try and achieve a balanced LP base of both Italian and international investors.

The last 12 months have seen an increasing flow of deals, so we want to raise a bigger fund. We will be seeking support from our current investor base, as well as from other LPs leveraging on the results achieved with our first fund.

Q What returns have you made, and what do you expect?

The first fund will return between 8.5 and 9.0 percent gross, or 6.5 and 7.0 percent net of all costs, which is at the upper end of what we expected. We think the return will be slightly higher for Fund II because Fund I had a proportion of traditional senior loans whereas Fund II will be more focused on unitranche and subordinated debt.