The connector

Personal networks, relationships and access to the right people at the right time are essential no matter where in the world private equity transactions are being pursued. But private equity investors and their financiers, familiar with the whole of Europe's commercial fabric, say there are few countries where being part of the country's inner circle is more important than Italy. It's not as if the country can't deliver exceptional deals when the ingredients are right: witness the ‡5.65 billion buyout in June last year of Seat Pagine Gialle ? Europe's biggest buyout ever and recently voted by our readers as the 2003 European Buyout of the Year. So how does private equity work in Italy? Philip Borel asks Gianfilippo Cuneo, someone who can talk about private equity Italian style with insider's knowledge, to share his views.

Rightly or wrongly, Italian business is widely regarded as insider business, where many of the strings worth pulling are still held by a small elite of often-colourful entrepreneurs and their families, politicians and bureaucrats. The fact that one of the country's most successful (and certainly colourful, many would add) businessmen also serves as its prime minister at present illustrates this perfectly. Where representatives of this elite throw their personal weight behind a project, interesting things tend to ensue. Where they don't, deals stall.

As a result, individuals acting as intermediaries between members of this power base, people with the ability to mobilise both clout as well as capital, are powerful figures in their own right. Consider them the connectors in a transaction.

Gianfilippo Cuneo – “Phil” to non-Italians who have worked with him – is one such connector. As a business consultant, he has advised many of Italy's most influential industrial decision-makers. Close to both local entrepreneurs and international capital, the Milan-based executive has played a significant role in establishing private equity in a market place that until the early 1990s was barely familiar with the concept. During the past ten years, Cuneo has been a key player in a number of landmark transactions that have done much to acquaint Italy's corporate community with private equity financing. He has moved in this steadily evolving market ever since it came into being and remains closely involved to this day. At a time when international interest in Italian private equity has hit an unprecedented high, this makes him an ideally positioned commentator on past, present and future developments. Hence this interview.

Italian private equity seems to be on a roll. Last year foreign private equity investors scored heavily with some of the biggest European transactions completed to date, most notably the enormous $5.65 billion, and second private equity backed, buyout of SEAT Pagine Gialle, Telecom Italia's yellow pages business (more of the first one shortly), and the Carlyle-led €1.6 billion carve-out of Fiat Avio, the Agnelli empire's aerospace division. At the same time, several domestic private equity groups were investing in a steady flow of small and medium-sized transactions.

Both trends kept Italy in the private equity news, creating substantial awareness both at home and abroad of the opportunities Italy offers and which the leading indigenous protagonists – Investitori Associati, BS Private Equity and Clessidra – were able to leverage in their efforts to market sizeable private equity funds to investors. Last August BS closed its fourth fund on €550 million, 10 percent above target and counting firms such as HarbourVest as very sizeable investors. Clessidra, founded by Claudio Sposito, former CEO of Italian investment goliath Fininvest, covered plenty of ground en route to a €1 billion debut vehicle, while Investitori Associati is currently on the home straight with its fourth buyout fund, which is expected to close ahead of its $400 million target this spring.

The fundraising success of these houses is one of many signs that the Italian market has matured. There are of course parts of Europe where private equity has a longer history, has achieved greater complexity and is subject to more competition. Nevertheless, to a pioneer like Cuneo it must seem that an astonishing transformation has already taken place. The first Italian private equity vehicle he helped instigate, Investori Associati's debut fund, raised the grand total of €15 million in 1992.

Cuneo first came across Wall Street style buyout artistry in the late 1980s. Having established the Italian office of McKinsey and Company in 1971 after working for the firm in New York and Paris, Cuneo teamed with rival consulting group Bain Consulting in 1989 to set up Bain, Cuneo & Associati, a consultancy practise serving large Italian and international corporate clients.

Bain's close affiliation with Boston-based buyout specialists Bain Capital made it a short step to meeting some of that group's dealmakers, whose approach to making money from buying and selling businesses left a lasting impression on Cuneo.

Back in Italy, he hunkered down with Antonio Tazartes, one of his main allies in building Bain Cuneo's consulting business, as well as Pier Domenico Gallo, a private equity minded former banker. Intrigued by the idea of importing a methodology similar to Bain Capital's into a market where private equity was still in its infancy, the trio decided to start a buyout operation focused on buying Italian assets and funded with local money. Banca Commerciale Italia agreed to cornerstone the venture. In 1992, Investitori Associati (IA) was up and running, with Tazartes at the helm, who continues to serve as the firm's senior partner.

IA's first investment, the buyout of Modena-based sticker maker Panini, proved an outstanding success as well as a signal of things to come. A family-owned business whose products were of near-irresistible appeal to football-loving children in Western Europe, Panini had been acquired by Robert Maxwell, the British tycoon, in 1988. It was an ill-fated move. What happened next may sound familiar to some who have witnessed badly handled acquisitions. Says Cuneo: “Maxwell didn't manage the business, the people in the company were flabbergasted at the price he paid and the management he sent in paid no attention to the delicate relationships that existed within the company.”

Cashflow quickly went from positive to negative, and by the time Maxwell died, leaving his increasingly motley collection of assets in tatters, Panini itself was on the verge of bankruptcy. In 1992, when an international auction was organised to sell the business, Cuneo, who had already produced a business plan, and Tazartes made their move. A consortium including IA and De Agostini, the publishing group, bought the faltering business, installed new management, moved into new markets and cut costs. By 1994, sales had doubled, and Panini was sold on to Marvel Comics, the US publisher known for its superhero series, for twelve times the syndicate's initial investment.

Aside from its financial success, the Panini transaction stands out because, according to Cuneo, it had many of the characteristics that he and those who worked with him afterwards were to encounter – and able to take advantage of – time and again. “We had early knowledge of the situation and were able to learn more about the company, its management and the market environment before the auction happened. The moment we set foot in the company, we knew exactly what to do with it. As investors, we actively worked inside the company and helped it grow, as opposed to just giving someone else money and letting them take care of the situation. It wasn't rocket science though – essentially we did what the Panini brothers used to do before it was all forgotten about.”

After helping to invest IA's first fund as a member of the management company, Cuneo left to concentrate on the consulting business. “I had concerns over conflicts of interests, and there was the issue of reputation. What counts in private equity is your average record, but in consulting, you have to do everything right every time. One failure out of ten cases in private equity would have had a negative spill over effect on consulting. I thought it best to separate the two activities and focus on consulting.”

But Cuneo personally invested in IA's subsequent funds, and continued to work closely with the group on transactions. Then, in the mid-1990s, he spotted an opportunity that ultimately resulted in one of Europe's most remarkable private equity deals of all time – the first buyout of SEAT.

At the time, one of Cuneo's clients was Telecom Italia, the state-owned telecommunications monopoly. Italy, due to join the European Community, was eager to privatise assets in order to demonstrate to its neighbours that it was ready to comply with EU business rules. Politically, privatising Telecom Italia was out of the question, but the government was looking into ways of transferring ownership of some of its assets into the private sector.

When the decision was taken, amid protestations from the parent company, to separate SEAT Pagine Gialle, the group's yellow pages business, and to bring it under the direct supervision of the Italian Treasury, Cuneo interpreted this as a sure-fire sign that the division was going to be sold to the private sector. Already operating close to SEAT as well as to many of the people who would ultimately decide SEAT's future, he started to study the company, its strategy and, crucially, its competition.

At the time Mondadori, the publishing enterprise owned by Silvio Berlusconi, was building its own directories business to rival SEAT. Cuneo analysed how that venture was progressing, interviewed agents of both businesses, and concluded that Berlusconi's project wasn't doing well: “Normally everything Berlusconi touches turns to gold, but in this case, it was going to be a flop.” Cuneo wrote another of his business plans – based this time on the assumption that SEAT's key competitor wasn't going to win – and decided that Lorenzo Pellicioli, a senior media executive he had known for 15 years, was the man to implement this plan. He took it to a group of potential investors to discuss a bid.

Convincing them was no mean feat. A deal would be massive, and the situation was more than just a little sensitive politically. “To us it seemed a gigantic challenge, but Gianfilippo persuaded us to take it on,” says a member of the consortium that was formed on the back of these discussions. “That alone, and the fact that he delivered Pellicioli as CEO, means that much of the credit for the deal goes to him.”

The same source says that few others could have argued the case for going after SEAT as forcefully as Cuneo: “I think he is unique in his ability to look forward and understand how a situation is going to develop and what is required to make it work.”

Thanks to Cuneo's powers of persuasion, IA, De Agostini and Banca Commerciale Italia agreed to come in, as did international private equity houses BC Partners, Bain Capital, CVC Capital Partners, Sopifa and ABN Amro Ventures. Cuneo was all set: “When the business was officially put up for sale, we had an advantage of three months knowledge.”

The government, driven on by its European agenda, wanted to move fast, so the bidding was quick, and the competition never managed to catch up. In November 1997, Europe's biggest buyout up to that point was complete: Cuneo's consortium had won the day.

While Pellicioli took over as chief executive, Cuneo chose not to join the board. “I wanted freedom of action to work as a consultant in the company and realise the business plan. We smashed competition, grew sales, expanded geographically. After two years, the value of the company had grown six times.” Then the internet boom arrived, and suddenly it became clear that the business could go a great deal further. SEAT embraced the opportunity, acquired the Italian equivalent of Yahoo, and the valuation of the company went through the roof. In 2000, SEAT was worth 20 times the syndicate's outlay.

It was time to cash in. Says Cuneo: “In private equity, if you don't know how to double the value of the company in the next four years, you have to sell. At 20 times our original investment, we had no idea how to do that, so we sold the business back to Telecom Italia.” Proceeds from the disposal totalled a stupendous €10 billion.

Not even the deal's architect could have foreseen what the internet would do to SEAT's market price. But according to Cuneo, the fact that the transaction would be a significant success was not at all surprising. SEAT was, after all, a state-owned company, and hence wasn't well run when Pellicioli took over. As Cuneo argues: “There is something about these assets that is difficult to quantify, but it always comes out. If the business plan says ‘go from 10 to 20 in terms of EBITDA, you can often go from 10 to 30. Every entrepreneur who has bought assets from the state has made money.

Cuneo says privatisation in Italy is no longer the rich source of opportunities to financial investors that it was. He has just spent the past two years trying to “repeat SEAT”, as he puts it, organising a €400 million equity consortium made up of several leading Italian investors and supported by Philip Morris to acquire ETI, the stateowned tobacco company. The move failed in July 2003 when British American Tobacco, put a significantly larger sum of money on the table than Cuneo's group.

ETI aside, Cuneo says the season of privatisation is over in Italy, at least for the time being. “The prime minister isn't a privatiser at heart. Berlusconi likes power, and he is a good politician in the sense that he understands how Italians think. They don't want Alitalia or the electricity supplier of Milan owned by private investors, and they're afraid of tough international ownership. Berlusconi respects that. Minority stakes in government-owned companies might be listed on the stock exchange to raise money, but that isn't at all the same as privatising them properly.”

Where financial investors, particularly private equity, should focus their attention instead is the private sector. Divisions of Italy's larger corporations, as well as smaller family owned businesses, have come to an inflection point, says Cuneo. Ensuring their future viability in a global economy requires change – change that incumbent man-agers are finding tough to execute and which cannot be funded in the way Italian enterprise was funded in the past. International competition as well as Basle II are forcing the domestic banks to change their lending practices.

This is the context to which Cuneo says private equity firms and mezzanine financiers stand to make good money in Italy going forward. (He has no doubt, for example, that the private equity groups that bought out SEAT for the second time will generate a significant return as well.)

The key, Cuneo believes, is to persuade Italian company owners to focus on value enhancement rather than control. “There still isn't much awareness that dilution is not a bad thing as long as value increases at a faster rate. Entrepreneurs thinking in terms of value should understand this. But if you think in terms of power, as many still do, it's better you remain with your small company in a monopolistic area and forget about it. The burden now is on private equity firms to show, not with words but with facts, that they are good partners who can genuinely help.”

Cuneo himself wants to stay close to this process. Because of the systemic forces eroding Italy's traditional ways of doing business, he says the current prospect for private equity and mezzanine in Italy today is “fantastic”, especially in the mid-market.

Now 60, Cuneo retired from Bain in 2002 to manage his personal investment portfolio and pursue a number of other initiatives. He is an investor in, and works actively with, the Borghetti Group, a business that owns consumer goods companies in Italy, Germany and Austria. One of Borghetti's investments, an Italian cosmetics retailer called Limoni, is scheduled to undergo a flotation later this year.

Cuneo is also a partner in Italian Mezzanine, a newly established firm currently seeking to raise a €100 million subordinated debt fund. In addition, he maintains a dialogue with a number of international private equity funds looking to participate in Italian transactions.

Not every initiative Cuneo has instigated has been a success. Angel Ventures, a €123 million venture capital fund raised at the height of the bubble, stopped making investments shortly thereafter. But this less happy episode has not undermined his enthusiasm for developing commercial ideas and applying his experience and contacts when working with talented entrepreneurs who are genuinely interested in generating value. “I make mistakes like everybody, but on the whole I think I know a good deal when I see one.”

“I've also learned that extraordinary individuals exist, and if you work with such individuals, good things can happen. Because they're extraordinary, you have to take the backseat, and to give them something that is of value to them: ideas, connections, courage, things like that.” This is what Cuneo has been doing throughout his career, and he's determined to carry on. Private equity Italian style seems to be the perfect stage for it.