Industry leaders address Italy's LP shortage

A brief look at private equity activity relative to the size of its economy reveals the Italian contradiction. Italy it is the eighth largest European economy; it is the eighth largest manufacturing economy in the world, responsible for 2.6% of global industrial production despite having just 0.8% of the global population, according to the General Confederation of Italian Industry – Confindustria; it is also the sixth largest country in terms of global export, with a 3.6% market share, and home to leading companies across niche industries.

Yet, despite the litany of characteristics that would typically set private equity hearts racing, just 3.8% of European private equity and venture capital dealflow this year has occurred on Italian shores, according to unquote" data, leaving LPs reluctant to back the country.

"We have traditionally invested in Italy, although compared to the size of the Italian economy it's a relatively small proportion that we invest if you compare it to smaller geographies like Scandinavia and Benelux," said Adveq vice president Richard Damming. "But we have invested in Italy and made successful investments that have done well." Comparisons with Scandinavia are stark; the region was home to three times as much dealflow as Italy this year, according to unquote" data. But Italy is even lagging in comparison to nearer neighbours. Spain has attracted a swathe of international investors and witnessed a wave of local fundraising, catalysed by the launch of government-backed fund-of-funds Fondo Ico.

No pain no gain
"People feel that Spain has taken more of the pain post-crisis and adjusted institutionally, and in a regulatory manner more to what was required in terms of reducing the sclerosis in the system, which we all know hasn't quite happened in the same way in Italy," said panellist Francesco di Valmarana, partner at Pantheon.

Adveq agrees: "It is at least perceived by international LPs that Spain has done its homework better," said Damming. Changes in bankruptcy laws, for example, enabled Adveq to commit to a local turnaround fund in Spain, though turnaround investment remains nigh on impossible in the Italian market due to stifling regulation.

Spanish buyout funds too have raised successfully – with several expected to close in the coming months – and fairly rapidly as local companies increasingly partner with external financial backers. Several more funds are expected to close imminently. And the private equity community has reacted accordingly. Said Damming: "The Spanish private equity community has been creative in offering solutions to international LPs to de-risk investments, offering staple transactions, co-investments to LPs and innovative solutions in fee structures. In general, it has been a more dynamic and proactive market than Italy."

And with the Italian regulator adding layer upon layer of regulation to what has already been parachuted in from a European level, the already difficult fiscal environment in Italy is enough to dampen LPs' spirits when it comes to doing business in the country.

Italy's PR problem continues, said Giovanni Orsi, principal at Coller Capital: "We have been investing in Italy for the past six or seven years and still when we bring an Italy-focused investment to the committee there is often a longer discussion than if we were taking the same type of investment opportunity from the UK. But when you look at the companies that Italian GPs have invested in, you realise that they are market leaders in their niche that are really dependent on international markets for their growth. Those are very good opportunities in the medium- and long-term."

Indeed, returns have been strong for some in Italy. In late December, Carlyle and Eurazeo listed luxury jacket maker Moncler, in an IPO that was 30x oversubscribed and the largest flotation in Italy since 2010. The GP made a full and final exit from the business in June this year, selling its remaining 7.13% stake for €12.04 apiece – up from the €10.2 share price obtained at the listing in 2013. The final chapter in the success story saw the GP reap 5.69x money and a 57% IRR.

No home support
But despite the possibilities of stellar financial returns, domestic GPs enjoy little support on their home turf. Though much effort has been put into Italy's quest to attract international LPs – indeed, one of the raisons d'etre of the Why Not Italy initiative was to dispel myths surrounding investing in the country – perhaps the first step lies closer to home.

Italian pension funds and insurance companies are critically absent from the LP bases of most local funds, despite regulation allowing them to invest locally. Statistics discussed in a keynote speech given by Ambrogio Rinaldi, central director of Covip – the pension funds supervision committee – revealed the unprecedented international bias of local pension funds, which commit almost 90% of their investment allocation abroad.

"[The lack of domestic support] makes the Italian private equity market that much more fragile, that much more susceptible to the winds of change in international sentiment," said Pantheon's di Valmarana. "This introduces an element of instability, which is something that worries investors in terms of team stability and the ability of franchises to grow and continue through various economic cycles."

Not only would stronger support from domestic LPs make Italian funds less exposed to international capriciousness, it would also send out a message that local investors are ready to put their money where their mouth is. "It would be a huge sign to the international community if the locals actually put some money in there," said John Holloway, director at European Investment Fund, which announced a new commitment to Italy in partnership with Fondo Italiano di Investimento at the conference.

International franchise
But, despite the challenges, one outfit that has managed to expand its franchise, opening offices in Munich and London and hiring staff, and boosting the number of international LPs among its investor base, is Ambienta. Its latest fund, Ambienta II, closed on €323.5m in early November, exceeding its €300m target. The investor base of its previous vehicle was primarily comprised of Italian investors, which accounted for 95% of capital commitments provided by individual investors.

For Ambienta's latest vehicle, international players including HarbourVest, Hermes, Pantheon and RobecoSAM contributed 51% of all commitments, 95% of which were made by institutional investors. And there was support from local pension funds such as CNPADC – the doctors' pension fund – which were recently given the chance to back Italian funds by the Italian regulator.

"It's not the same [as it is abroad], but they are getting there," said Ambienta founder and managing partner Nino Tronchetti Provera. From domestic and international sources alike, there is money available for strong managers.

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