Italian update

Massimiliano Talli, a lawyer at Monaco e Associati, notes that at present small-sized deals are not being considered by private equity firms as everyone seems to be chasing the larger transactions. According to Roberto del Giudice at AIFI (the Italian Venture Capital Association), the small- and medium-sized market segment has not risen much in 2003, because operators have concentrated on large buyouts. However, he believes the mid size segment has a lot of potential and he is confident there will be growth in the next few years. Francesca Murra reports.

Marco Forasassi-Torresani, CEO of Eidos Partners, part of the Close Brothers Corporate Finance European network, says the Italian market is becoming more mature. “There has been an increase in the number of players raising a number of funds, and the teams are becoming more and more experienced. However, I think that this increased concentration will lead to a segmentation in the market with a creation of tier one and tier two funds.”

To a large extent this is already happening. Forasassi-Torresanidescribes fund raising activity as becoming more selective, as investors focus more on the successful funds. He says: “Whereas a few years ago it was easy to raise money if you had a good investment team, now there has been a concentration of top players which have been involved in a large percentage of the larger transactions, and which are attracting most investors.”

Therefore a mixed picture emerges in terms of successful fund raising activity in 2003, where some funds managed to raise large amounts, while others were unable to close their funds. However, according to many market participants the fact that there is more selectivity, and a greater attention to the track record of the funds and the people that manage them, is positive.

Carlo Pirzio Biroli, CEO of Morgan Grenfell PE Italy, says: “In 2003 quite a number of GPs relied on secondary buyouts as a way to return money to investors. I see this continuing in 2004.” Liquidity events such as the FL Selenia secondary sale to Vestar Capital Partners is thought to have helped Doughty Hanson in a difficult fund raising market.

Giuseppe Campanella at Mediolanum says of 2004: “We will see some exits, not because the time is right but because funds are reaching the end of their investment periods and are pushing for exits, while looking to begin new fund raising activities for second funds.”

Fund raising activity was stable between 2002 and 2003, notes Mara Caverni at PricewaterhouseCoopers. However there is a fragmentation in terms of the active funds. Captive funds are declining and independent funds doubled compared to last year. Mara Caverni says: “We will see in 2004 more and more a trend towards the independent funds, which are likely to attract capital, especially where they can show a clear track record and are well known in the international markets. ” She adds that good news for 2004 is there is already new fund raising activity.

Overall market players point to some fund raising in progress but it is probably not an easy time. Market players also point to a change in the banks’ attitudes as they retrench from private equity.

Carlo Pirzio Biroli argues Italian investors in private equity are not going to be the same in the future: “Whereas in the US and Europe most of the market is driven by institutional asset managers, in Italy 50% of capital is still from captive sources (e.g. the banks.) These sources of capital are down-sizing their proprietary private equity investments due to regulatory and other reasons.” Pirzio Biroli warns Italian banks might reduce their exposure to private equity funds before Italian institutional investors (i.e., foundations, insurance companies or asset managers) start investing consistently in the asset class. Going forward, this will require local funds to rely more on foreign sources of capital.

2004 Trends

Forasassi-Torresani says 2004 looks like a more difficult environment, with companies not faring so well, so it is difficult to find opportunities with good perspectives. Giuseppe Campanella from Mediolanum, a fund-of-funds investor agrees, saying 2004 will be a transition year, with not too many other large buyouts on the horizon, aside from Autogrill.

The sale of Autogrill, the motorway service stations that presently belongs to the Benetton Group, is considered to be the most important deal so far in 2004. Other deals in the pipeline include SAECO public-to-private and there could be other divestments from both Cirio and Parmalat. Many players point to general opportunities arising from both private and public Italian conglomerates. But Forasassi-Torresani believes there will be fewer opportunities arising from the restructuring of large groups, while the real opportunities, he says, will continue to exist in the traditional mid-sized Italian family owned companies. He adds: “Market conditions are difficult at present and bank finance is getting more scarce.”

Mara Caverni at PricewaterhouseCoopers say in the mid-size market the trend of secondary buyouts which will continue in 2004.” She adds that these firms need to grow and the private equity sector will be a good source of future capital. Enrico Canu at PM Partners says the middle market should be one of the most attractive in Italy, but that 2003 was affected by a general slowdown in the economy.

Canu says there are still a lot of opportunities in Italy arising from family business: “These companies have to become more managerial, others need to grow in size and the private equity sector may have an opportunity to help companies to grow and develop opportunities,” he says.


Figures released by AIFI show in 2003 51% of funds were Italian compared to 61% in 2002. The other funds were distributed predominantly between capital from Europe and the US. “We have seen Italian operators increasingly acting jointly with foreign companies and looking for larger sized deals,” he says.

The 2003 end of year figures also seemed to indicate a departure from the figures released for the first half of the year, where investment was down by 45% compared to the same period of the previous year. At that stage AIFI attributed the drop to Italian firms looking outside the home turf for investments. Roberto del Giudice at AIFI says this was a result of the internationalisation of the Italian investor base, which he believes will be a trend for the future.

However, it remains to be seen how much money will continue to flow into Italy after Parmalat and Cirio. Giuseppe Campanella says: “Italy remains a very marginal market in terms of international asset allocation. I think it is very much media driven in terms of whether Italy gets a good or bad press and as a consequence whether investment funds flow in.”

Campanella says although there was great interest last year and some large buyouts enthusiasm will diminish, mainly because of Parmalat, even though funds may be underweight with respect to Italy. He adds: ” A few months ago I was more positive in terms of raising money outside of Italy. Today I am less confident.”

The other significant and continuing trend is that most of the figures show over 80% of investments in 2003 were made in the North of Italy with very few linked to the centre and South of Italy. Del Giudice, however, points to new funds being launched by funds that are focussing on the mezzogiorno. He says these began operating at the end of 2003, and will begin to be active in 2004.

Mara Caverni at PricewaterhouseCoopers adds that a few investments have been made in the Centre and the South, where capital was attracted to good companies, although these are often difficult to spot.

The types of sectors that attracted funds in 2002 and 2004 remained the same, largely manufacturing and chemicals. While 2001 was still suffering the ill effects of the high tech boom, 2002 saw a reversal in investments towards more mature industries, which continued during 2003. Mara Caverni at PricewaterhouseCoopers says: “In particular in Italy we suffer from low investment in the high tech sector, which I believe needs to be addressed and somewhat increased.”

Talli points to another area that is underdeveloped, the turnaround sector. However, he points to the need for bankruptcy law reforms in Italy before more active involvement will be seen by private equity firms. Parmalat and other Italian industries that have been in difficulty have not turned to the private equity market. According to Talli this is because the private equity market has not got the laws or instruments in place to intervene. Aside from the need for legislation for private equity, Talli also says there is a common view among industrial companies that PE firms are viewed as speculative partners.

However, news reports suggest Livolzi, a former MD of Fininvest, is looking to set up a turnaround firm, which would look to raise around €5bn to €10bn.

2003 activity levels

Recently released 2003 figures from the Italian Venture Capital and Private Equity Association (AIFI) indicate trends for private equity and venture capital in Italy differ from the rest of Europe; where Italy saw a 16% increase on the amount invested, totalling €3.04bn, European investment volumes contracted.

These figures were driven by the emergence of a few large transactions. In the past large deals were considered somewhat of a rarity in the Italian market, but what drove the amounts invested during 2003 towards a strong increase was the presence of large buyouts carried out in the second half of the year. These deals accounted for more than 50% of the total invested.

Examples of these large transactions include the FIAT restructuring and Telecom Italia. In the case of FIAT, two of its

most important subsidiaries were sold as going concerns: FIAT AVIO bought by Carlyle, and FA Selenia bought by Vesta Capital Partners. The other was the SEAT Pagine Gialle deal, which involved BC Partners, CVC Capital Partners, Investitori Associati and Permira.

Italian corporate law reform update

Italian private equity fund managers are anticipating significant changes in their investing environment, for better and in some cases for worse, on the back of the Italian corporate law reform which came into effect on January 1, 2004. Angela Sormani reports.

“The impact of the corporate law reform as it has evolved will both positively and negatively affect private equity in Italy,” says Francesco Portolano of law firm Portolano Colella Cavallo Prosperetti. He cites certain new rules on the duration of shareholders’ agreements, appraisal rights and minority shareholders’ rights that may, in certain scenarios, create some problems. On the other hand, the new rules on directors’ duties, LBOs, shares and new tax regimes may greatly benefit funds and their transactions.

A major issue following the reform is the introduction of a five-year maximum duration for shareholders’ agreements. Previously the time frame was unspecified. Portolano explains this five-year limit may be a problem if the investor takes over five years to exit, as has been the case with some private equity funds in recent years.

Another concern for private equity managers is that minority shareholder rights have become broader. This means minority shareholders will have more protection and will have more say in the running of a company. For example, now minority shareholders holding at least 20% of the capital may bring a suit for liability directly against the majority shareholders. Previously this was not possible.

There are also new rules governing the acquisition of groups of companies. A majority shareholder in a company may be liable, in certain cases, vis-à-vis minority shareholders, and even creditors, of the company. For example, if a fund owns over 50% of a company the fund could be held liable for certain intra group transactions, such as transactions with other portfolio companies. This new regulation may incur extra costs for private equity funds.

On the plus side, a modification in the rules applicable to the structuring, rights and features of a company’s shares will provide much greater flexibility and firms will now be able to tailor their equity, stock and financial structure to their needs. The new corporate rules will allow firms to issue shares with different voting and/or dividend rights, shares with veto powers, no-par value shares, tracking stock and non-share instruments etc.

The reform will facilitate transactions for VCs taking a minority shareholding where the investor might want some sort of dividend preference with a guaranteed minimum return each year. It is now possible to grant a dividend preference to a VC where before this was controversial in Italy. The reform will also enable VCs to more clearly define the rights of minority shareholders such as managers and other investors.

In addition, an investor is now able to receive shares belonging to a class of shares with special rights. For example, an investor may not want to be involved in the day-to-day management of a company, but may want to be informed of any major decisions taken by the management. The by-laws can specify, for example, that Class B shares (those belonging to the investor) have some form of veto power over the distribution of dividends.

Another major improvement Portolano underlines is that now a director appointed by a private equity fund will have a much narrower liability, providing he/she does not take an operational role. “Non- executive directors are in a much safer position than before and will be less inhibited to do deals and sit on the board of directors,” says Portolano.

Changes to tax legislation will also benefit private equity funds and are seen as a significant improvement. There are also some innovations that could have an effect on fund structuring such as the tax transparency of structures, which should make it simpler to structure funds in Italy.

Portolano is optimistic the changes are for the better: “My impression, based on the law, and from the fund managers is that there’s going to be a significant improvement in operating environment and this will help private equity in Italy.”