Generational turnover makes PE in Italy more pressing than ever

Ambienta founder and managing partner Nino Tronchetti Provera has observed two prominent trends currently affecting the Italian market and believes private equity is best placed to capitalise on the situation. He encourages GPs to use this opportunity to boost their activity in the country.

The first trend regards the generational turnover gathering pace in the country. In the 1960s, Italy experienced an economic boom, which led the country to an industrial economy based on family-owned businesses. Today, the country's economic structure has remained largely unchanged.

According to a survey from Italy's chamber of commerce and industry, family-owned companies make up 93% of the country's small- and medium-sized enterprises and, as Tronchetti Provera observes, the founders are now reaching retirement age. "Italian entrepreneurs are on average older than their German colleagues," says Tronchetti Provera. He adds: "Against this backdrop, the private equity industry represents the right key to address the situation."

The second trend concerns globalisation of local businesses. According to Tronchetti Provera, Italian enterprises, as well as their European counterparts, "need to boost their internationalisation to compete in the market, which means companies need higher management expertise to lead their business on a global scale".

Given these two trends, private equity is in prime position to supply new business leaders in response to generational turnover, as well as to support the increasing need for the internationalisation of Italian businesses. In these circumstances, Tronchetti Provera says Italy's need for private equity is more urgent than ever.

Despite this, Italian buyout activity dipped in the first quarter of 2016, as documented in the most recent unquote" Private Equity Barometer. "The Italian private equity industry moves in the rear guard of Europe," says Tronchetti Provera. "This year, we saw a slow start compared to the first quarter of 2015, mainly caused by several surrounding conditions. However, the restrained activity of domestic institutional investors is what primarily holds back Italy's private equity industry. Particularly, I am referring to the domestic pension funds."

Pension funds under pressure
Figures from Aifi, the Italian private equity and venture capital association, show that fundraising activity in Italy increased by 92% to €2.8bn in 2015 from €1.5bn in 2014. However, pension funds accounted for only 18.6% of the country's fundraising activity in 2015 and domestic pension funds made up just 11.9% of the total fundraising. In 2014, the percentage of capital raised from pension funds in Italy was 16.3% of total fundraising activity. In comparison, the same values in the UK and Ireland were 29% in 2015 and 40.3% in 2014, according to figures released by trade body Invest Europe.

Italy has only a small number of pension funds and they are discouraged from investing in private equity because of the regulatory environment. At the same time, the aging population puts Italian pension funds under increased pressure, forcing them to search for additional capital to supply their swelling expenditure.
"The way to raise capital for pension funds is to invest in alternative assets, particularly in the private equity industry, where they can reap higher money multiples," says Tronchetti Provera. He sees Italian pension funds beginning to bolster their investments in private equity, but Italy should promote new regulatory reforms on both the LP and GP sides to strengthen this process and enhance the industry.

Italy is the only European country where carried interest is yet to be regulated" – Nino Tronchetti Provera, Ambienta

He says regulation of carried interest is the most important reform Italy should undertake: "Italy is the only European country where carried interest is yet to be regulated." In addition to that, Tronchetti Provera believes the country should relax constraints on Italian buyout houses, which face similar levels of regulatory controls as banks.

He believes Italy should adopt the reforms before deals become the prerogative of international GPs operating in the country. Indeed, according to Aifi's 2015 figures, 41 international GPs are operating in Italy, against 120 domestic GPs. But while the latter accounted for a total deal value of €878m, the international buyout houses were responsible for €3bn deals worth.

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