In 2011, just three private equity funds managed to collect capital from investors – and they raised only €500 million combined, a fraction of the €3.3 billion that was raised by nine funds in 2008, according to data provider Preqin.
Many investors, as well as corporates, held off from purchasing Italian assets. The only active buyers in the Italian buyout market at the time were German companies, recalls Raffaele Legnani, a managing director and head of Italy at HIG Capital, who added, however, that they managed to buy businesses for “extremely good prices”.
But the economic tide has turned. Italy has since elected a new government that has given a positive message to businesses, according to Legnani. “It’s similar to the ‘Yes, we can’ that [US President Barack] Obama had in 2008. The Italian government will reform the country and international [investors] believe it,” he said, adding that consumer confidence had also improved.
While deal volume overall in Europe was subdued during the first half of the year, Italy saw something of a renaissance. It has hosted two of the biggest European buyouts of the year: CVC Capital Partners‘ acquisition of Italian gaming business Sisal Group for €1 billion, and Hellman & Friedman’s €1.2 billion acquisition of TeamSystem, an Italian software business, according to the Centre for Management Buy-Out Research.
In the past 18 months, there has been a flow of money from American and British buyers, according to Legnani. “International investors are looking in Italy because prices in the Nordics and the UK are high. In Italy, prices are lower,” he said.
Michele Semenzato, founding partner of Wise SGR, an Italian private equity firm, agreed that international private equity firms were hunting for deals in Italy again. “Ten years ago, the larger European buyout firms all had offices in Italy, but closed those down post-Lehman. Some of these players are looking at deals again, a reflection of the opportunities in the market.”
While Semenzato has noticed that interest in Italy has picked up, he said he did not think the country was ever a bad place to invest. “If you talk to [investors], they will tell you that they have seen really good returns in the last five years. My point is, it is not suddenly [interesting] to invest in Italy. Italy is the second-largest exporting economy in Europe after Germany.”
Italy is known for its industrial businesses in the north and its successful export of numerous consumer brands. Southern European private equity firm Investindustrial turned round motorcycle business Ducati in recent years and sold it to Volkswagen in 2012, while Milan-based private equity house Clessidra currently owns Italian fashion house Roberto Cavalli.
Competition for such trophy assets is growing, Italian buyout executives say. Corporates and private equity houses are not the only ones hunting for deals – sovereign wealth funds are also showing an interest in Italian companies. Investindustrial and Edizione Holding, an investment firm of the Benetton family, are in talks to buy Fedrigoni, an Italian paper business, for about €700 million, according to a person familiar with the matter. This follows Singaporean sovereign wealth fund Temasek’s previous attempt to acquire the business, the person added.
Enter the Qataris
Meanwhile, the Qatar Investment Authority, the sovereign wealth fund of Qatar, is intent on building an Italian portfolio. It has backed three private equity dealmakers to source investments in southern Europe, according to two people familiar with the matter. Ramon Arocena Soria, a former Advent International director, Nicola Colavito, a former Barclays managing director, and Carlos Cortina, formerly at Spanish electricity company Grupo Endesa, have set up Peninsula Capital Advisors and are currently investing a €600 million private equity fund – all of which has come from the Qatar Investment Authority, the people said.
QIA has also allocated a substantial amount for potential co-investments alongside the vehicle. Peninsula will be able to invest in public companies and private companies, taking both majority and minority stakes. It will invest in national champions across all sectors and will write minimum equity tickets of about €100 million. One person said QIA was keen to have a local team on the ground to source investments.
And in 2015, asset management firm Neuberger Berman teamed up with Intesa Sanpaolo, an Italian banking group, to form a private equity team to invest in Italian export-driven companies, according to a statement at the time. It is raising €600 million for its debut buyout fund, according to Preqin. In total, there are 10 private equity funds in the market aiming to collect a combined €3.45 billion to invest across the country.
Competition is fierce, according to Legnani. “There are some very crowded auction procedures,” he said. “You can only get a couple of short interviews with the management team. It is terrible now. If you don’t like the process, you can just go. For [investment] banks, it is easier when you leave when you don’t like the [way the process is run] because they have plenty of other parties that are interested.”
Instead, HIG Capital tries to source deals off-market so it can take its time getting to know the company, he said. “We held talks with an owner of a business recently that wanted to sell his company and, after speaking to us, he got so excited about our plans for the business that he decided to keep a minority stake. That’s the kind of environment we like to work in, but it is very tough to find such opportunities.”
One executive at a buyout firm that invests in Italy said it was vital to have a local network, adding that Middle Eastern sovereign wealth funds and Chinese buyers were finding it hard to source good deals. “They know they are being shown overpriced deals, [so they often don’t end up investing]. If they do something, they buy trophy assets for very high prices.”
Richard Damming, executive director at Swiss fund-of-funds manager Adveq, said that, in the past few years, asset prices in Italy had dropped significantly, with an average deal multiple of 6x earnings before interest, tax, depreciation and amortisation, compared with 13x in the UK and northern Europe. He said: “Now you are seeing that prices have become higher, so people will be asking whether this success will be short-lived.”
However, he said prices were still lower than in northern Europe and that the number of secondary buyouts – where one financial sponsor sells to another – remained low. Although Adveq would actively consider an investment with an Italian private equity manager, he said that “it’s still a difficult story [to put in front of an] investment committee, even when the results are good”. He added that some investors still saw Italy as a risky place to invest, particularly because some Italian banks potentially face another government bailout.
Yet private equity executives do not believe banks will retreat from buyouts in the mid and large-cap space. Legnani said: “Getting leveraged loans from Italian banks is not an issue. Even the banks on the front page of the newspapers are still lending money.”
If anything, the non-performing loans that Italian banks hold may be a source of deal flow for private debt funds that are increasingly active in the country. In September 2015, US private equity giant KKR set up its European credit platform Pillarstone, which has so far hoovered up loans from Greek and Italian banks.
Bayside Capital, the credit arm of HIG Capital, held a first close in July on a fund that will also invest in bad Italian debts held by the country’s banks. For the fund, it has joined forces with Italian private equity firm Idea Capital Funds.
Legnani said: “Since 2008, Italian banks have had a huge problem. They have loans that on the market are worth a fraction of how they are counted in their books. Unfortunately, the capital that the banks need to hold in order to take that loss is not enough for them to sell.”
Instead of purchasing the loans, the Bayside fund will provide money to support the turnaround and growth of the borrower companies, Financial News has reported previously. The firm has so far raised €260 million for the vehicle, an indication that investors see opportunities in this space.
Armando D’Amico, founder and managing partner at London-based placement agent Acanthus Advisers, believes investor appetite for Italian buyouts is increasing. Acanthus recently helped raise Italian private equity firm Alcedo’s latest fund. “My view is that [investors] are positive on Italy and [investors] usually back one or two teams in Italy. I think interest is picking up but the proof is in the pudding and whether the next generation of funds will perform well.”