Italian PE players highlight silver linings amid crisis

"The pandemic has dramatically hit the private equity industry, causing a reduction in deal volume and value, and a significant decrease in fundraising activity," said PwC partner Giovanni Tinuper, setting the tone of the discussion at Unquote's Italian Private Equity Forum. "Since July, the market has shown signs of a recovery and the outlook looks promising, with a rich pipeline and several deal processes kicking off in the next few weeks. However, concerns remain high on how the market will deal with new challenges presented by the crisis."

Fundraising activity across the country has been particularly affected by the outbreak, with disruptions and delays in numerous fundraising processes. Italian GPs have raised less than €1bn so far in 2020, and it is very unlikely they will manage to reach the record of last year, when buyout and generalist funds collected €6.8bn across 10 closes. However, this crisis is unprecedented and differs from every disruption that the industry has faced in the past, thus presenting unique challenges requiring new strategies.

"Despite this enduring uncertainty, there is an abundance of capital in the market looking for returns," said Raffaele Legnani, managing director and head of Italy at HIG Capital. HIG is currently on the market with a new buyout fund, HIG LBO European Private Equity Fund III, which started fundraising at the beginning of July. The fund is already oversubscribed, has held some partial closings and expects to reach its final close next month.

Legnani said: "This is nothing like what we saw in 2008, when there was an economic recession and a credit crisis. Today, especially across the alternative assets market, there is a lot of dry powder available and investors continue to believe that private equity is a very promising space to allocate money. To attract resources, GPs need to guarantee stable and predictable returns by diversifying risk across different countries and geographical regions. This wider strategy is much more appealing than focusing only on one single country, especially in the current market scenario."

However, for local GPs with a specific focus on the country, enticing LPs reluctant to becoming over-exposed to the Italian economy has been difficult and has often resulted in delays to the launch of their new platforms. Challenges in completing successful exits and dull portfolio performances have also contributed to a temporary stagnation of their fundraising activity.

"This crisis has affected our ability to launch new funds in the short term, not only because it has caused delays in our discussions with LPs, but also because it has severely impacted our exit strategy," said Eugenio De Blasio, CEO and managing partner of Green Arrow Capital. "Exits are essential to measure the successful performance of a private equity fund and the pandemic has caused postponements in exit plans for our existing portfolios. That's why we decided upon a delay of six to nine months for the launch of our fourth private equity vehicle."

LP attraction
The success of a fundraising project can also be impacted by the specific needs and expectations of the different LPs that a private equity firm intends to attract, as Eriprando Guerritore, partner at law firm Gatti Pavesi Bianchi, underlined: "The challenges faced by GPs in fundraising can vary substantially depending on the type of LPs they want to entice. Insurance companies for example have reduced their allocation to private equity and this is due to capital requirements that they need to face. However, more opportunistic LPs and various funds-of-funds continue to invest in the Italian market, alongside state-sponsored vehicles."

The European Investment Fund (EIF) is among the largest international LPs actively investing in private equity and venture capital funds across the continent. Marco Natoli, EIF's head of lower-mid-market for northern, eastern and southern Europe, spoke of how the fund had taken steps to bolster the industry: "We have opened new facilities to respond to the specific needs of the market during the crisis, and have facilitated fundraising by speeding up our process and taking part in first closings as much as possible, helping funds reach their critical mass.

"Among other initiatives, the European Guarantee Fund has been designed specifically to address the needs that emerged from the crisis. It will support GPs that are falling short of their fund size or are unable to reach the necessary critical mass to deploy their strategy; it will offer capital to existing funds that have already completed their investment period, but are in need of additional liquidity to support companies affected by the crisis; fuel private credit strategies; support the launch of turnaround funds; and replace defaulting LPs."

In order to attract investors amid the complex situation generated by the pandemic, GPs have increased their diversification by broadening their investment spectrum, exploring new market segments and strengthening debt, credit and special situation strategies.

We expect [increasing appetite for private debt] in the coming months, especially once the various public schemes put in place in Italy and other countries across Europe to support SMEs end" – Marco Natoli, European Investment Fund

"Private debt has become a very interesting strategy across Italy, able to attract large pools of capital from a diversified base of LPs," De Blasio said. "We noticed that banks are more focused on providing financing to small companies and that there is space for interesting investment opportunities for debt funds. This is why we changed our schedule and decided to accelerate the launch of our second private debt fund."

Natoli added: "Interest in private debt has increased dramatically in the LP community, given that many investors are looking for less risky and volatile strategies. In addition, when LPs consider their capital allocation ratios, private debt investments are more beneficial. We expect this trend to accelerate in the coming months, especially once the various public schemes put in place in Italy and other countries across Europe to support SMEs end. At that point, these companies will need to look for alternative liquidity resources that can be provided by private debt funds."

Venturing out
Another winning strategy amid the pandemic is venture capital. The segment has been attracting the interest of a number of LPs and has been able to raise larger pools of capital than in previous years, panellists argued. Natoli underlined that the venture capital industry is becoming stronger, and has been benefiting from the emergence of new business models and the pre-eminence that the technology sector has achieved. Therefore, valuations across the segment have not been impacted by the emergency as they have been for private equity buyouts.

GPs have also expanded their reach by focusing on companies with specific needs, which can be more suitable for receiving the support of a sponsor. "Most investors are currently chasing companies that have not been affected by the pandemic, with the risk of overpaying for them," Legnani said. "On the contrary, we prefer to focus on companies that are excellent assets in the long-term, but have been affected by the coronavirus emergency in the short-term. They provide an interesting opportunity for a transformation process of their business models, which will guarantee high returns.

"At the moment these assets are quite rare because financial support is widely available across the market and temporary layoff benefits from the government have helped many companies cover the labour costs that they are suffering. This, however, will soon come to an end, and we expect that next year there will be a wide array of companies in need of a significant business transformation."

Portfolio support
In the difficult climate created by the pandemic, GPs have responded with a shift in their management approach, reinforcing their focus on portfolio performance; increasing the deployment of resources to optimise portfolio companies' efficiency; and upgrading their business models to guarantee value creation.

Mauro Roversi, chief investment officer of Ambienta, said: "We have been focusing on strategies that prove to be resilient to Covid-19, such as buy-and-build, which allows a company to rapidly grow and expand its business by leveraging its own internal managerial and operational competences. This strategy has become essential for private equity players to continue their capital deployment and pursue value creation in the portfolio. At Ambienta, for example, we completed an important add-on for our portfolio company Nactarome by acquiring Create Flavours in the UK, following a due diligence process that was conducted entirely digitally."

The pandemic has also shown GPs and entrepreneurs the importance of digital transformation. This trend has accelerated the radical reconfiguration of many companies that had followed a more traditional business model or had not progressed in their technological development and innovation.

"Covid-19 has noticeably accelerated the digitalisation of our portfolios, which has become essential for value creation," said Francesco Orsi, managing director at global private equity firm Eurazeo. "We have a team dedicated to digital innovation, able to support portfolio companies and management in finding the most effective strategies in pushing forward the innovation of our businesses."

"These important changes are destined to last after the Covid-19 emergency ends," said Raffaele Cestari, a partner at PwC. "We expect the transformation triggered by the pandemic will bring innovation across the entire economy. This is a great opportunity for our managers and investors, and an important chance for our companies that have often lagged behind in terms of digital innovation."

Looking at the coming months, it will be essential to keep an eye on valuations in order to understand the real extension and gravity of the crisis, panellists agreed. A readjustment of prices is largely expected and might lead to great discrepancies across sectors and regional markets, while providing attractive opportunities to eager investors.

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