Private equity to bank on evolution of Italian SME financing landscape

Italian banks have historically been inclined to provide financing on the basis of warranties on fixed assets, rather than focusing on cash flow and future prospects. The move towards mini-bonds is designed to broaden the range of financing options available to under-capitalised SMEs and support growth capital.

In May 2014, the country's state-supported Fondo Italiano d'Investimento revealed its commitment to mini-bonds after receiving €350m worth of backing from local bank Cassa Depositi e Prestiti. Eight months later – after announcing a €600m joint commitment with European Investment Fund – the firm released the names of 10 private debt funds to receive up to €250m. These included GP-managed vehicles dedicated to mini-bonds. In each case, Fondo Italiano's commitment is dependent on the fund manager's ability to raise an equal contribution from other LPs.

In the right hands
Fondo Italiano's targeting of vehicles managed by private equity houses is welcomed by Fabio Sattin, executive chairman and founding partner of Private Equity Partners: "There is a need for stable, diversified financing structures in Italian businesses to support long-term investment and international development," he said. "When equity transactions are hard to secure, mini-bonds provide an alternative. The mentality for making sound mini-bond investments – perhaps with equity warrants attached – is aligned with private equity. It is important to understand a company's development and its long-term projects."

Sattin argues that mini-bond vehicles managed by banks do not necessarily provide the answers needed within the country's financing spectrum. He points to Italy's high concentration – the largest in Europe – of financing provided by banks and the requirement to decrease their role. There is a risk of mini-bonds being issued in order to repay company debt on less favourable terms, instead of being used to support long-term development such as acquisitions. With debt now more readily available in Italy than during the financial crisis, treating this more expensive type of borrowing as an alternative to senior debt is unwise.

"As of today, most mini-bond issues have been made in order to repay debts to banks. According to analysis conducted by consulting company CSE Crescendo, out of 1.2 million mini-bonds issued in recent months in Italy, 68% have been used to repay pre-existing bank debt. The hope is that Fondo Italiano and Cassa Depositi e Prestiti's involvement will change that," said Sattin.

Competition or partners?
With banks likely to view private equity-run funds as direct competition, it is unlikely they will act as LPs to these vehicles. This raises the question of how straightforward the fundraising process will be. It stands to reason that pension funds and insurance companies would be ideal targets for investor relations teams and placement agents. Sattin explains that – due to the novelty of the product – there is a steep learning curve for both types of investors in terms of understanding mini-bonds before they invest.

Another factor likely to impact on the country's private equity market is whether the Italian government passes new banking regulations that would see its largest banks transformed into joint stock companies. If passed, the law would remove the one-vote-per-shareholder structure of the 10 largest players in the sector, paving the way for mergers and acquisitions. Sattin believes consolidated banks could adopt the approach of international players and shift their approach from asset-backed lending towards a focus on cash flow and expected profitability. This would be a welcome evolution in the financing landscape, but improvements in operating practices and training are also necessary.

Whichever way new financing products are used in the short term, there are positive signs that Italy's efforts to reform its financing playing field could pave the way for an attractive deal-making environment.

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• Topics
• Southern Europe
• Italy
• Top story
• Fondo Italiano di Investimento
• European Investment Fund
• Private Equity Partners SGR Spa
• Unq2015Mar