Coronavirus outbreak leaves Italian PE industry in limbo

After initially reporting only a few cases of Covid-19, the north of Italy – which has the highest concentration of manufacturing activity and production facilities in the country – saw a spike in infections at the end of February. The situation rapidly escalated and the contagion reached 6,000 cases and claimed more than 300 lives in less than two weeks.

Following this surge, in March the Italian government placed the most affected areas of the country under quarantine, including Milan and the entire Lombardia region, as well as 14 provinces across northern Italy.

A few days later, a nationwide restriction on movement and travel was imposed by the government until 3 April. The measure prescribes that, in addition to the closure of schools and universities, public gatherings are forbidden; cinemas, museums, theatres, gyms, bars, restaurants, clubs and most shops excluding grocery stores are closed; and all sports are suspended, including Serie A (Italy's top football league). In the meantime, numerous airlines, such as British Airways and Ryanair, have cancelled all their flights to and from the country.

The total number of infections in Italy – at the time of writing – has risen to nearly 25,000 and the death toll has passed the 1,800 mark, with most of the victims being elderly with previous medical conditions.

Affected by the uncertainty, the stock market plummeted, with the FTSE Mib index down 16.92%, while Italy's 10-year bond yield gap over Germany hovered above 220 basis points. Meanwhile, the government has pledged to spend €25bn to reduce the economic impact of the outbreak.

Standstill
Severe repercussions are already visible in the Italian private equity market, which has completely stalled from the end of February and has not seen any buyouts announced in the last 20 days.

Fineurop Soditic CEO Eugenio Morpurgo says: "Disruption will not affect deals between signing and closing, but will cause delays and possible price reductions for those deals where only a letter of intent has been signed. Furthermore, we expect new deals that were going to come to market and new auctions to be put on hold until the financial results for Q1 2020 are available. This is particularly important because this is not a liquidity and financing crisis, but is a type of disruption that directly affects revenues and EBITDA generation, with immediate repercussions on the real economy."

Several GPs contacted by Unquote said that some imminent deals – with PE both on the buy- and sell-sides – have been put on hold for now. Travel restrictions, quarantines, shutdowns and office closures are making it difficult to run the necessary due diligence and impossible to hold in-person meetings – often crucial to seal a deal.

This raises the question of whether the pandemic will deeply and irreversibly affect the local economy, arresting the forward momentum achieved by the Italian private equity industry in the last few years, and perhaps even triggering a recession.

"It is still difficult to assess the human and economic costs of the virus in Italy," says Green Arrow Capital CEO Eugenio De Blasio. "What we can certainly see is a slowdown in due diligence and deal-making, despite most GPs and companies having put in place contingency plans for international travel, online and conference call meetings and remote working policies. We expect the situation to further deteriorate in the short term, especially given that travelling across the country and setting up meetings is currently impossible. However, the country's economy is more resilient, strong and mature than it was during the 2008 financial crisis, and will likely be able to quickly recover and overcome the effects of the contagion."

In the meantime, special options and legal mechanisms such as material adverse effect clauses are expected to become more commonplace.

The economic impact of the contagion will also differ across sectors, with certain industries more resilient than others, such as healthcare, while sectors that significantly rely on travelling or the global supply chain – such as tourism and retail – are at a higher risk of collapsing.

The outbreak is likely to have a major impact on fundraising activity as well, which might struggle to maintain the fast pace of 2019, when Italian buyout and generalist funds raised €6.8bn. According to market sources, LPs are likely to become more and more anxious and reluctant in allowing over-exposure to the country, and coronavirus fears are expected to slow down fundraising during at least the next six months.

Selection of Itlaian PE funds on the road

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