After putting in a surprisingly robust performance in 2008, Italy’s buyout market has been in a state of near total paralysis for the first six months of 2009. Only two transactions – both at the bottom end of the middle market – are known to have been completed.
And with the exception of a possible distressed deal involving the struggling listed eyewear manufacturer Safilo, there is precious little on the horizon for the later-stage private equity community in the region. The prospects are particularly bleak given that two of Italian economy’s core strengths, industrial manufacturing and consumer sectors, have been so badly hit by the recession.
Of course, this will not come as much of a surprise to buyout specialists anywhere in Europe, most of whom are doing anything but transacting. But on the face of it there should be some cause for optimism in the Italian market.
To begin with, the highly fragmented Italian industrial landscape, dominated by family-owned SME businesses, remains ripe for buy-and-builds and consolidation plays, especially when the green shoots of recovery begin to emerge.
Also, and perhaps more importantly, the Italian banking sector has fared better than most of its European peers over the last 18 months, due to its mercifully low exposure to sub-prime losses.
This means that there is still appetite to back leveraged transactions, albeit at lower multiples, with higher fees and much stricter interest cover. Two banks in particular, Intesa and UniCredit, are in the market to lead or arrange leveraged transactions, and other smaller local institutions will follow in club deals.
However, the volume of senior debt available for any one deal does not actually amount to much: the banks that are in the market to club together are not likely to muster more than about €150m–€200m of debt in all, and they would be reluctant to lend at more than three times Ebitda. This effectively puts a cap on the size of transactions that could be taken on, and will cause major issues for the relatively sizeable community of larger buyout investors present in the market – both local and international.
If one adds to this the difficulty that many groups are facing to keep their investees above water and the fact that local banks are being increasingly selective about which GPs they support, it becomes clear that the market in Italy is at something of a crossroads.
Indeed, the current conditions have led many players active in the region to question whether the market can sustain the population of upper mid-cap and larger investors and whether the whole buyout model will have to change.
According to one prominent Italian buyout investor, there is likely to be a 30%–50% mortality rate among locally based buyout teams. And if the rumour mill is anything to go by, this claim might not look so sensationalist: international groups such as BC Partners, Candover, Cognetas and PAI Partners are all thought to be looking at scaling back or shutting down their Italian operations, while local heavyweights Investitori Associati and BS Private Equity are said to be suffering severe issues with their portfolios, which are effectively taking them out of the market for new deals and may well leave them struggling to raise new money.
However, any fears that the buyout model in the Italian market is so fundamentally broken that it will not survive the extended downturn look a little premature. There are still some well-funded, well-respected buyout teams active in the market, with both the connections (a must-have in Italy) and the industrial nous to take advantage of the opportunities that such a fragmented industrial landscape offers.
In addition, it is highly likely that many of the talented individuals who find themselves without a ship to sail in the larger buyout space will reappear in the medium term to captain a new wave of local mid-market specialists.
As for the banks and the power that they have to bring about a lasting change to the buyout market, history tells us that they have relatively short memories. When global economies show real signs of growth and company earnings begin to recover, the leveraged lending business is just too lucrative for them to ignore: they’ll be back.