Rediscovering Italy’s backbone

A recent PEI visit to Milan discovers a market returning to its roots and facing up to some uniquely Italian challenges.

“Today success in Italy comes from transforming a quality domestic company into an international competitor, and that starts with an understanding of our local economy”, asserts Andrea Bonomi of Investindustrial, a Southern Europe-focused private equity firm. 

Bonomi’s demeanour fluctuates between excitement and sombreness as he divides his attention among the print-outs laid neatly across the large conference room table in the firm’s Milan office. The papers show Italy’s economic growth rocked by the global financial crisis but projected to follow a stable trajectory in the coming years, in part steered – one hopes – by the country’s private equity industry. Going through more pages of statistics and data, Bonomi pauses to highlight Italy’s public debt climbing to 103 percent of GDP in 2008, but contrasts the figure with Italy’s household debt, one of Europe’s lowest.

“Italy’s growth will be driven by small- and medium-sized businesses that make up the backbone of our economy,” stresses Bonomi, before pointing out it has been these businesses which have most benefited from the country’s relatively high savings rate and where Italian private equity has had its most successes. 

And when asked where Italy has experienced its most failure, Bonomi takes little pause in denouncing the structure of some large buyout deals more characteristic of his Anglo-Saxon counterparts.  


“People wanted to create something that wasn’t there, at least not for Italy,” recalls Fabio Brambilla, general partner at Advanced Capital, a fund of funds firm with a strong footprint in Italy. During the good years it was “fashionable to deal in high leverage and multiples similar to the style of some big-name US and UK players who began scouting more deals in Italy”, Brambilla explains. 

Candover Partners, the former European buyout stalwart, illustrates the trend. It opened a Milan office during the heyday of the credit-driven buyout boom in late 2006. The firm’s leveraged secondary buyout of Italian yacht-maker Ferretti in 2006 was to become one of the credit crisis’ highest profile failures, when in 2009 the company was finally restructured Candover’s equity position was wiped out. By this time, Candover had written off the equity in its other Italian investment: fitness equipment maker Technogym.

In Italy the exuberance prior to the crash would result in a record €5.5 billion-worth of investment activity in 2008, according to the Italian Venture Capital and Private Equity Association (AIFI). However, the pullback brought on by the global financial crisis meant investment totals would drop to €2.6 billion in 2009 – more than a 50 percent decline – and even further still in the first half of 2010.

However the post-crisis environment would also push Italian private equity to revert to its roots in the mid-market. True, total investment value took a nosedive, but measured by number of deals the damage looked less severe: the peak of 170 deals signed in the first half of 2008 was not far from the 129 deals mustered in the first half of 2010. 

“What happened was the smart players continued scoping opportunities in the mid-market, where the deal flow had always remained decent, especially for non-vanilla transactions”, explains Mirco Dilda, a partner in private equity firm Argos Soditic’s Milan office. Indeed, in the first half of last year 78 percent of deals were early stage investments or expansion capital, a 23 percent jump from 2008, while the size of average buyout transactions would fall roughly a third from its average of €25 million in 2008 to €16 million in the first half of 2010, according to AIFI.


While tightened credit markets resulted in a similar return-to-smaller-deals story across much of the continent of Europe, Italy has had to grapple with challenges peculiar to its culture and economic history which have hampered its rebound from the crisis. The vast opportunity in Italy’s mid-market, for example, is limited by family owners unwilling to cede control of businesses which have been passed on for generations, points out Dante Leone, a private equity specialist at Milan-based law firm Capolino-Perlingieri & Leone. “The option then is to either accept a minority stake in your investment or convince the family of their business’s potential.” 

Succession issues in the private equity industry will increasingly become a factor in Italy down the line, adds Jean-Pierre Di Benedetto, a fellow Argos Soditic partner. The first generation of private equity professionals who laid the groundwork for the industry in the mid-90s are due to retire in the forthcoming years and only few firms have cultivated the next crop of leaders. 

And while succession questions have been raised across all geographies, Italy is especially acute to the matter as “people who have a pole position of power tend to relinquish it with more regret here”, observes Leone, who points out Italy’s 74-year-old prime minister as evidence of the trend. 

But perhaps most challenging for Italy’s private equity market is the limited support received from domestic institutional investors. Traditional sources of investment such as pension funds, insurance companies and endowments have taken little interest in the asset class, resulting in the need for firms to search abroad for capital. 

In Italy the public pension system is structured under a pay-as-you-go system, meaning pensioners are not paid in part through returns on investments – such as private equity – but from the state’s general revenues. So while the US or Canada house large public pension systems acting as pacesetters among institutional investors, Italy is void of any California Public Employees’ Retirement System or Canadian Pension Plan Investment Board investing in the asset class.. 

“It’s only been the past five years that pensions and insurance companies have even become fully aware of private equity, but even so they still perceive the asset class as risky,” says Elsa Fornero, a scientific coordinator at Italy-based Centre for Research on Pension and Welfare Policies. 


But in spite of these concerns, many point to the future of Italy’s private equity market as bright. A move towards specialisation and globalisation is helping some mid-market firms become experts in one specific industry and then introducing its portfolio companies to international markets, says Investindustrial’s Bonomi, whose firm opened a Shanghai office last year as a way of capturing growing Asian demand for Western products. 

Italy will also continue developing as a strong player in high-end industrial companies and renewable energies, says Mauro Roversi, partner at Milan-based private equity firm Ambienta, who explains Italian companies will benefit from the rising global focus on waste and sustainability issues which will drive  demand for clean technologies. The firm closed its first environmentally-focused fund in 2009 with €217.5 million in commitments to capitalise on the trend. 

“Italy is also still very much behind on its migration to online businesses, leaving ample room for growth for otherwise sophisticated businesses,” adds Leone.   

But regardless of which industry sees the most activity, local practitioners of private equity agree on one point. “Our future is in small- and medium-sized businesses, where you don’t rely on the growth of multiples, but on the growth of companies,” declares Bonomi, as he piles away the papers bearing Italy’s various economic indicators.