Forza Italia

The market in Italy continued to flourish throughout 2000, with investments up by 67 per cent to L5.748 billion, according to the Italian venture capital association, AIFI. The number of transactions rose by 66 per cent to 646 deals. Contributing to this healthy activity is the boom in the number of players that have entered the Italian private equity arena recently. The development of the Italian market over the last ten years and the opportunities these changes have provided has resulted in the arrival locally of a number of international private equity firms. In 1990 AIFI had 30 members. This figure stands at over 80 today.

The difference in experience levels of these players is huge making for a fragmented but interesting marketplace. The more established, veteran players are those with their second or third fund on the go and a consolidated structure to their investment portfolio. Among the new entrants, there has been a growing trend for specialised funds, a new phenomenon to the Italian market, and towards which there are mixed feelings.

Early stage at a stand still

There is a freeze on early stage investments in Italy at the moment, says Edoardo Lecaldano, founding partner at Alice Ventures, a prominent Italian early stage investor in the IT and biotech sectors. In 2000, investments in seed and start-up accounted for just over L1 billion of total investments in 339 transactions.

It is a commonly held view that Italians are generally slow to catch onto new technology fashions and for this reason, Italy was a slow starter when it came to jumping on the Internet bandwagon. Lecaldano says that before the Internet bubble burst, the Italians had just started to latch onto the trend so, when the market crashed, it was these young start-ups that suffered as they had not yet built up any resilience.

Alice Ventures is now approaching investments with caution. Lecaldano describes the firm as unique in that there are no other Italian VC funds targeting exclusively early stage IT investments and for this reason he can sit back and wait for the deals to come to him. The firm has three quarters of its second fund left to invest and has already started fundraising for its third fund, which has a target of between euro40 million and euro80 million with an imminent first close on the horizon. Alice Ventures is also in the process of setting up an office in Israel, where it has strong links. The firm is already looking at deals out there and has a headhunter on the ground with a view to setting up a team its first outside Italy.

Wonderland is a non-profit association established by Alice Ventures in collaboration with Mediobanca, Bocconi University in Milan and the Polytechnic of Milan. Wonderland’s purpose is to promote Italian business culture and spread awareness of VC activity among the high tech industry. Activities promoted in 2000 were Wonderland Contest 2000, a competition for young entrepreneurs and Wonderland Workshop 2000 that pinpointed difficulties faced by Italian VC’s. Next month, the second edition of this workshop will review the issues to see if there has been any progress in improving the mechanics of the Italian market.

One of the major factors holding back this market, says Lecaldano, is the aptitude of Universities and the academic world in Italy. Until recently, for legal reasons, it was impossible for University professors to mix their research with a profit-making organisation. A professor was simply not authorised to take leave and invest in a start-up company. This issue was addressed in the workshop and the situation appears to be improving, according to Lecaldano.

Last year over 500 teams submitted business plans to the Wonderland Contest 2000. This year Lecaldano says the number has dropped to just 200. This is testament to a dwindling of the Italian entrepreneurial spirit, he suggests. “Young entrepreneurs feel discouraged. This is a great shame,” he says. “My feeling is, in this respect, that over the next few years there will be a generational gap in start-ups.”

In spite of the current investment climate, in the last 18 months Alice Ventures has only had one failure in its portfolio. Of its six investments in the biotech sector, two have been approached by a large bank wanting to do an IPO by the end of this year. Lecaldano’s gut feeling, however, is that as a biotech venture, it would be better as a trade sale. He also feels it is still a rollercoaster at the moment in terms of IPOs. Indeed on the Italian stock market in the first quarter there were only three companies that made successful flotations Acegas on the Mercato Telematico Azionario and PCU Italia and Datalogic on the Nuovo Mercato. This is nevertheless one more than in the first quarter of the previous year when only e.Biscom and I.NET listed.

Locality is key

Recognised as a landmark in the Italian private equity market, Morgan Grenfell Private Equity’s acquisition of a 90 per cent stake in Piaggio marked a turning point in the Italian buyout market. A deal of this size is something that players could not have envisaged two or three years ago. But these mega deals are far and few between in Italy, where there is more of a focus on small to medium sized family-owned businesses when it comes to later stage opportunities.

Guido Belli of Bridgepoint Capital comments on the changes in the Italian private equity scene. The ever-increasing trend in Europe for consolidation and restructuring, he says, is having some effect on the Italian market, but he adds that large corporates are not characteristic of corporate Italy. There are some exceptions such as automotive giant Fiat, which is in the process of restructuring, but this is not a phenomenon that is traditionally embedded into Italian culture. In January the Fiat Group, as part of its ongoing strategy to focus on core activities, decided to review all available strategic alternatives regarding its auto parts plant, Magnetti Marelli. This included the possible divestiture of certain of its business lines or potential alliances with other leaders in the automotive components industry.

Bridgepoint Capital set up in the Italian market in 1996 when there were few new entrants. Since then many new players have established funds for investment in Italy, including major US firms such as Vestar Capital Partners and Bank of America, which set up base in Milan four months ago. Belli stresses the fact that locality is key when making investments: “It is essential to have an Italian team on the floor. If you want to do deals in the Italian middle market, you have to have guys on the ground and a good grasp of the Italian language and culture.”

Antonio Perricone of B&S Electra also stresses the importance of a local team: “It is unthinkable to send a foreigner out to source deals. There is so much theatrics involved in seeing through a deal, it is rare that someone coming from a major international financial institution would be able to play by the rules you must have Italian personnel.”

The fact that there are such a large number of competitors makes life very tough if you are fighting for deals in the same space, says Belli. But it also marks Italy’s development as a maturing market. In the past, Italy’s financial culture was underdeveloped compared to its European counterparts. This is changing. However, looking at the fall in the number of buyouts this year compared to 1999 (in 1999, euro830 million was invested in 35 deals, while in 2000 the number fell to euro757 million in 14 companies), Belli voices concern. “If in the next two to three years, the private equity market does not go back to the way it was in 1999 to at least 40 deals a year it will be a very tough operating environment with all the competitors that are setting up in the region.”

He compares the Italian market to when the French buyout market emerged several years ago. The French market was big enough but was made up of small investments that weren’t particularly attractive to investors. Now with the mega deals of Lafarge and Picard of the past year France is a booming market and the second largest buyout market in Europe.

One of the more outstanding deals of 2000 was Clayton, Dubilier & Rice’s investment in Italtel, Telecom Italia’s telecoms switching equipment and systems integration subsidiary, a transaction valued at approximately euro1 billion. CD&R’s Fund VI provided euro285 million of equity in exchange for 50.1 per cent of Italtel, while Cisco and Telecom Italia each own around 19 per cent, Advent International holds nine per cent and Brera Capital, two per cent. Will Schmidt, managing director at Advent International in London, said despite the turmoil in the telecoms market, Italtel is still enjoying tremendous growth and there are hopes that the company will float in the near future. He said: “Italtel is protected from much of the current market turmoil because of its advanced technology, as well as the nature of its customer base that is generally well-funded.”

Last August also saw a significant step in the internationalisation of Italian business with the sale by Advent International, Apax and 3i of their stakes in TDL Infomedia, publisher of the Thomson Local directories in the UK to SEAT Pagine Gialle, the Italian yellow pages publisher for an equity stake of GBP308 million and the assumption of debt.

On 23 April, SEAT announced that it has made a recommended exchange offer to all the shareholders and holders of warrants of ENIRO AB, the leading yellow page and business directory supplier in Northern Europe. The offer amounts to a total value of approximatley euro3 billion. The combined entity will have a presence in 27 European countries representing an estimated potential market of 9 million business advertisers. The merger will provide SEAT with opportunities to continue the roll-out of its directory assistance and marketing information businesses across Europe.

The LBO issue

As far as the legal framework of the Italian market is concerned, a law was introduced in 1999 to remove constraints about interventions of close-end funds in investee companies and provide a wider operating flexibility for all players. From a fiscal point of view, the 2000 Financial Law introduced preferential tax revenue treatment for Italian closed-end funds. The law reduced the fiscal rate from 27 per cent to 12.5 per cent on fund revenues giving a strong impulse to the development of Italian closed-end funds.

However, legal issues continue to hold back the Italian private equity market in some respects, particularly as far as the LBO is concerned. There is a very hostile environment at the moment with what some players describe as contradictory judgements in terms of financial assistance. Efforts are being made when promoting a new law to clarify the rules for LBOs, but for the moment activity has stopped in the Italian market as far as traditional LBOs are concerned and the Italian private equity industry is treading carefully.

Antonio Perricone of B&S Electra sees this is a major issue that needs addressing and he says the Italian private equity market is eager for developments, but it looks unlikely that anything will happen until at least September.

Funds are flourishing

Funds raised in 2000 grew by 33 per cent, reaching L5.663 billion. Of this total, around 40 per cent is dedicated to buyouts, 33 per cent targets seed and start-up, and expansion is allocated 25 per cent of these funds. Around 90 per cent of private equity funds have a generalist focus, according to Raymond Totah of pan-European private equity investor Argos Soditic. He is reticent about funds with a specialist focus, saying: “It is so difficult and competitive out there, especially if you are limiting yourself to just one sector. At the moment, there is no need to become specialised in the Italian market. It is still very young and it is early days.”

Nevertheless, the Italian market has recently seen the emergence of several specialist funds dedicated to the Italian market. One of the most recent and unique in its sector is Opera, the first international closed-end fund investing in companies that provide Italian-made goods and services. The fund was set up by Renato Preti, former director of Morgan Grenfell Private Equity, and the Bulgari Group, a leading global brand in the luxury goods market, which holds a 50 per cent stake in the management company and has invested up to euro26 million in the fund. With a target of euro250 million, Opera takes into account the fact that many medium-sized Italian companies have good quality products, but a lack of strategic vision, organisation and adequate marketing, branding, commercial and financial policies. Opera has an innovative approach in that it is a combination of a closed fund and a strategic investment company. The fund has significant flexibility in the type of investments, by a strong involvement of the participating companies, as well as a commitment to subsequent acquisitions in the same segment. Last month, Opera completed its first investment in a leading manufacturer of watches, Sector, which has around a 12 per cent of the Italian market.

Merchant banker Livolsi & Partners set up its specialist euro200 million fund Convergenza in 1999 with a focus on telecommunications, media and content technology. Frederic Arnaud, managing director of the fund, says Convergenza is somewhat of a novelty in the Italian arena and that there are not so many well-established Italian funds with a specific approach. He adds, however, that entrepreneurs in Italy are becoming more experienced and placing more importance on developing their skills in investment, especially in matters of due diligence. “Due diligence in Italy today is much better than five or six years ago when it was a word that virtually did not exist,” he says. Convergenza’s portfolio is still young with investments that are between six and nine months old and so the fund has not yet witnessed any realisations. Arnaud revealed that of its ten investments so far, half of these are already being investigated by third parties in a manner that could provide the fund with an exit.

Difficult time to exit

According to AIFI, for the first time in three years total value of divestments has decreased to L900 billion while, by number, exits have been demonstrating an upward trend since 1997, up to 186. Trade sales account for the majority of this figure with a 56 per cent share, followed by IPOs with a 17 per cent share. Certain players say that the impact of generational change on the Italian corporate sector has led to an increase in IPOs.

A direct competitor to Convergenza and well-respected player in the Italian private equity community Pino Venture’s Kiwi fund started out four years ago as the first high tech fund targeting Italian deals. Founding partner, Elserino Piol, says of the current climate for exits that there has been a recent trend for companies to rush to IPO in less than a year. This, he stresses is impossible if a company has yet to reach a certain level of stability and proved its business model. From its present fund Pino Ventures does not have a company in its portfolio more than two years old and the fact that the IPO route is not at its best does not jeopardise the firm’s current activities, says Piol. Kiwi II closed last October with 104 investors in the fund including some of the bigger names in the Italian market such as Banca Monte de Paschi de Sienna, Banca Poplare di Bergamo Unicredito Italiano and Banca Popolare Commercio Industria.

Exits via the secondary buyout route have fallen, taking a 13 per cent share in 2000, compared to 29 per cent in 1999. In spite of this decrease, Antonio Perricone of B&S Electra foresees an increase in secondary buyouts in the coming years because debt is widely available and buyout funds have money to spend. Last year B&S Electra sold Guala Closures SA, Alessandria-based manufacturer of safety closures for alcoholic beverages, for around A245 million to Investitori Associati II. Another secondary buyout of sorts completed by the B&S Electra team with Arca Merchant last year was the acquisition of Salmoiraghi & Vigan, optical retailers from De Rigo for L96.8 billion. Previously, De Rigo acquired General Optica, holding company of Salmoiraghi & Vigan from CVC Capital Partners.

There is great potential in the Italian market for releveraging companies and also in the public to private sector, says Andrea Negri of Advent International. He adds that there has been a reversal of rules as far as listed companies are concerned and that by delisting, certain companies become financially more attractive.

Private equity has an ever-increasing role to play in the development of Italy’s small to medium sized company segment. With the arrival of more players into the Italian market, it is inevitable that such a small space is becoming over-crowded. However, many of these funds are pan-European and it is not a matter of how many investors there are that should concern players, but the flow of deals. It is the increase in the money available for investment that is sparking opportunities in this market.