Italian pre-IPO fund eyes first close on €120m

Launched in May 2016 with a €150m target, Azimut and Electa’s IPO Club vehicle expects to complete its fundraising from private entrepreneurs and high-net-worth individuals with a first closing on €120m at the end of October 2016. Subsequently, the GP is understood to target a final close in November 2016 with further contributions from institutional LPs, mainly banking foundations and pension funds.

The fund aims to bolster Italian mid-sized businesses and support their launch on the AIM segment of the Italian stock exchange. Following the experience of Azimut’s 2014-vintage vehicle, IPO Challenger, the new fund claims to offer new investment opportunities for Italian investors willing to diversify their portfolios.

It is a matter of solving a concrete issue, namely to bring fresh capital to emerging companies and, at the same time, giving our investors a certain way out" – Giancarlo Maestrini, Azimut Global Counseling

According to Giancarlo Maestrini, head of Azimut Global Counseling, “Italy’s economy has a strong industry-based structure with 30,000 SMEs. Against a backdrop of low interest rates and low commodities prices, more than 15% of those companies posted increasingly positive figures over the last three years. The fund targets this segment of the market, with particular regards to the fine mechanics, food, biomedical, pharma, textiles, apparel, design and media sectors, which are going to perform very well this year.”

More precisely, the vehicle targets Italian SMEs with an enterprise value ranging in the €70-300m bracket and with net debt of around 1x EBITDA that aim to float on the Italian stock exchange in 6-12 months’ time. Maestrini told unquote” the fund intends to agree a set share price with the entrepreneurs prior to the IPO in order to secure the company’s landing on the public market and, at the same time, offer LPs certainty with regards to their way out.

As part of its investment strategy, IPO Club aims to lead an investor syndicate to purchase a 30% stake in the companies. The fund would secure one third of the minority stake, while 20-25 LPs would co-invest with a €500,000 minimum ticket to acquire the remaining stake.

Portfolio pipeline
According to Maestrini, the vehicle has already set up informal negotiations with several companies and ultimately aims to complete 8-10 all-equity transactions during the five-year investment period.

With a seven-year lifespan, the fund targets a 10% annual return, with a 1.2% management fee on committed capital and 1.3% on called capital. Furthermore, the fund has a 20% performance fee and 4% hurdle rate with an absolute high-water mark. Free from lock-up as well as drag- and tag-along clauses, the agreement with the LPs consists of a “mechanism of financial benefits” according to Maestrini, which aims to persuade the co-investors to retain their stake alongside the fund managers for a three-year period.

To put this mechanism to work, IPO Club offers its LPs an equity warrants package, whereby the warrants can be exercised at three expiration dates across the fund’s three-year holding period, explains Maestrini. “This should convince our co-investors to retain their stake and hedge the company from high volatility as they enter the public market. We chose an encouraging mechanism over a discouraging norm,” he says.

Following the fund’s investment, the companies avoid the typical IPO hurdles, including the information memorandum, pilot fishing and the delicate process of the definition of the share price, given that the investor syndicate negotiates the price with the majority shareholders prior to the listing. The agreement complies with Italian law, which requires a minimum of 17 investors and an on-the-market defined price to admit a business on the public market.

“It is a matter of solving a concrete issue, namely to bring fresh capital to emerging companies and, at the same time, giving our investors a certain way out,” says Maestrini.

People
Azimut Holding – Pietro Giuliani, Paolo Martini, Giancarlo Maestrini.

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