Italy: The state as entrepreneur

The first half of 2013 has seen Italian dealflow fall to its lowest point since H2 2009, according to unquote" data. Conspicuous in their (almost) absence during the slowdown were the state-supported funds, upon which the local industry has come to rely as a source of constant dealflow.

Though vastly different in investment strategy, Italy's three state-supported vehicles are united by the financial backing of Cassa Depositi e Prestiti (CDP) – a hybrid investment bank that lies outside of public administration, but is 70% owned by the state.

With its majority state ownership, the stalwart support lent by CDP is representative of state backing, despite CDP coffers essentially containing private cash. Crucially, the Italian model is also long-term: CDP recently announced its continued commitment to indirect private equity investment as part of its proposed 2013-2015 Business Plan.

Three of a kind
F2i, a national infrastructure fund with €1.85bn on the books, is the eldest of the state-supported vehicles. Much larger is the Fondo Strategico Italiano, a colossal €4bn fund that backs businesses with "strategic" relevance in Italy. But the most active is the Fondo Italiano di Investimento.

In 2011, this latter vehicle accounted for 22% of all transactions completed in Italy by volume, according to unquote" data. The most hyperactive investor on the local scene, the GP has completed a whopping 32 direct investments since its launch in 2010, ensuring a peak in deal volume in 2011 – its first full year in operation.

The investor is understood to have entered fundraising for its second vehicle this year, coinciding with a sharp slowdown in deal activity across Italy. Lauded by its supporters as the anchor of a tumultuous market, the vehicle has come some way in maintaining the local private equity industry without distortion, committing expansion capital in a buyout market. Its effect is undeniable and revealed by the downturn during its recent absence.

But it is in its most recent role as a fund-of-funds that its influence has perhaps been most welcome. Last year, contributions made by the Fondo Italiano enabled the launch of a new VC investor in Italy: formed by the merger of Italian VCs JVcapital and Annapurna Ventures, United Ventures recently held a first close of its maiden fund on €30m. The state-backed vehicle also committed capital to Idea Sgr, a local private equity player. And most recently, the fund supported the launch of venture capital initiative Programma 101, which includes a €50m fund, suggesting that as well as helping to sustain the status quo, Fondo Italiano is keen to boost industry innovation.

Tempting them back
While only time will tell how the joint ventures fare, the full force of the fund-of-funds has been felt in a time when attracting foreign capital is particularly challenging for local players. Anecdotal evidence suggests that for several local GPs, meetings with prospective foreign LPs are often spent explaining that the GDP of Italy is more akin to that of the UK than Greece – more a question of public relations than track record.

As a result, a recent contribution from the Fondo Italiano to a vehicle raised by Sofinnova (Sofinnova Capital VII) was a welcome tactical move. "When we invest in these funds, there is a rule that they have to invest at least the amount in Italy that we put in – or more," explains Guido Corbetta, professor at the University of Bocconi – where an observatory on PPP is currently underway – and member of the board of Fondo Italiano.

In a similar fashion, the Fondo Strategico Italiano launched a €2bn joint venture with Qatari holding company Qatar Holding to form IQ Made in Italy Venture, which will back export companies in 'Made in Italy' sectors. In an attempt to grow foreign investment in Italy, both parties will commit equal capital over the next four years, an intention that was reaffirmed in CDP's 2013-2015 Business Plan.

But just how important is foreign investment to the Italian market? According to unquote" data, it is crucial to its survival. Between 2008 and 2012, international investors were involved in just 29% of deal volume. Yet they brought in almost 70% of the cash. Data suggests that once GPs sample what Italy has to offer, they like it enough to commit the big bucks. Incentivising foreign players to make that initial investment could, therefore, have a dramatic effect down the line.

Room for improvement
But despite the benefits, many industry professionals have questioned the public nature of such funds. Speaking of the F2i, one industry veteran suggests: "If you look at their investments they are not really public. They made a lot of investments in the photovoltaic energy sector, which is entirely private. Now that market is over, but a lot of private investors invested in solar energy in the last five years because of high subsidies. A lot of private money went into this area, so it isn't a public-private partnership."

And in informal discussions with big international buyout firms, your correspondent has heard about the more capitalised state-backed funds cropping up in larger, hotly-competed auctions alongside those players with purely commercial intentions. Opponents suggest these large funds drive up asset prices with their bulky balance sheets.

In order to sidestep the challenge to traditional private equity players, perhaps then future state-backed activity could be better suited to those areas that do not initially present the highest returns, meaning private investors need an extra push. "I think social housing, social entrepreneurship, venture capital... there are many initiatives in the social area that could be developed in partnerships," says Corbetta.

And others agree. "We need some ventures with public budget plus private money that try to develop new ways to service the healthcare and education market, for example," says Luciano Balbo, founder of social impact firm Oltre. "We need to work not only on cutting the public spending, but also on making public spending more effective. And this means a new model that can be developed in a public-private partnership."

Public versus private equity will be a topic of debate at the 7th annual unquote" Italia Private Equity Forum in Milan on 12 November. Click here to book your place. 

All data is sourced from unquote" data, the unquote" proprietary database. To conduct your own searches on pan-European private equity trends, visit unquotedata.com

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