A marriage of convenience

With debt liquidity drying out in Italy as in other markets, those looking to do M&A transactions are having to think pragmatically. Hence the arrival of the corporate-private equity firm partnership.

“We aren’t in competition with trade buyers,” says Fabio Sattin, chairman and founding partner of Private Equity Partners. “We want to work in co-operation with them.” Late last year Private Equity Partners was part of a consortium that also included MPS Venture, 21 Centrale Partners and Idea Capital Funds, that joined forces with facilities management business Manutencoop to acquire a rival unit at Pirelli Real Estate. “In today’s environment, we have to play a much more industrial game,” explains Sattin. “If we want to make good returns, we need to join forces with trade.”

Filippo Gaggini, partner at Investitori Associati agrees. “We will see a lot more deals in which corporates and private equity houses join forces,” he says. “A number of private equity houses are doing this and there are a number of this kind of deal on the market at the moment.”

You scratch my back…

The rationale? If trade buyers don’t have liquidity and can’t get debt finance to make acquisitions in today’s buyer’s market, they can team up with those that do: private equity houses that have raised funds and are now struggling to deploy them. For private equity houses, the benefits are synergies and strategic advantage.

“There are a lot of fundamentally sound companies in difficulty at the moment that make good targets for stronger strategic players looking to expand,” says Gaggini. “For them, private equity offers cash, but it also offers something the banks can’t at the moment: certainty of commitment. The money may not be as cheap as debt or mezzanine, but it’s not as expensive as equity used to be as firms are having to adjust their IRRs downwards.”

Strategic players also get the benefit of the experience of private equity managers in addition to the money they provide. “This type of deal is a true partnership,” says Sattin. “Private equity players are not like banks, which are passive lenders – we sit on the boards of these companies and can add value.”

“For private equity houses, their main concern at the moment is having some kind of solidity in their investment and a level of predictability,” says Gaggini. “Partnering with a strategic player can help reduce the volatility in returns.”

This approach could also help private equity houses now they need to take a more industrial approach to their investments. “An over-reliance on financial engineering was an issue in the mid-market as well as the large deal space before the credit crisis,” says Raffaele de Courten, founding partner of Alto Partners. “Funds are going to need to be much more hands-on and really be able to demonstrate their industrial credentials and value-add.”


But it’s far from a magic bullet. “We have seen some of this type of deal,” says Mara Caverni, partner, transaction services, PricewaterhouseCoopers. “But a lot of corporates still have liquidity and for those that don’t, this can be a complex way of funding deals.”

She points to shareholder agreements as a particular difficulty. “You have to make sure everything is clear from the outset to ensure there are no differences of opinion over strategy,” she says. “The other point to bear in mind is the timing of the exit.”

Indeed, not all trade buyers are sold on the idea. “We recently acted for a strategic buyer on a large deal,” says Umberto Nobile, partner in charge of private equity at Ernst & Young. “A number of private equity firms were interested in partnering, but the trade buyer wasn’t. There are a lot of issues to work through, such as a private equity house’s time horizons, although in some situations this type of deal can work.”

Private equity players are more optimistic about the prospects, possibly because they have to be in current market conditions. “This may not be easy to execute, but these deals are possible,” says Gaggini. “You have to have a clear view on the exit and firm agreements on the future of the company. You have to broker an agreement that the company could buy you as the private equity player out of the investment and/or that you could put 100% of the company on the market.” One clear path to exit could be a plan to exit the company over the next 18 months or so.

Regardless of the difficulties, it’s an approach being seen in some other markets. 21 Centrale Partners in France, for example, teamed up last year with licence-free automobile manufacturer Automobiles Ligier to acquire rival Microcar. “Private equity is having to adapt to the market,” says Sattin. “It can’t go back to what it was doing before. It has to take a pragmatic approach, understand what the market needs are and supply those needs.”