2013: an excellent Italian vintage

"Historically, and still today, Italian SMEs are undercapitalised," said Stefano Zavattoro, managing director of Credit Agricole Private Equity, at the 6th annual unquote" Italia Private Equity Conference this morning in Milan. "In a moment where the banking system is lending less money and the capital requirement for investment from those companies are higher, there is a good opportunity and potential in the development capital market. 2013 could be an excellent vintage," he added.

Particularly in the venture space, the Italian market is under-populated. There is very little competition and the country's business landscape is predominantly made up of SMEs. As credit lines tighten and capitalisation levels fall, the space for expansion capital widens. "Italy is a country of SMEs; one in three workers in Italy is an entrepreneur. It really is in the DNA of Italians," said Marco Ariello, managing partner of Syntegra Capital, one of few GPs in Italy considering an IPO for its diary company Moleskine.

"But growth capital has been a more or less neglected category in Italy, and it is time to move in that direction. What's more, many SMEs will face succession issues and generational change in the coming years," Ariello said. "These companies are family-run, and exit is thought of as a failure, so owners are very sceptical in the face of private equity. But there is a great opportunity for private equity to step in here." With the majority of companies in Italy recording four employees or fewer, it seems that a buy-and-build consolidation strategy is a sensible route to follow. And with more than €6bn in dry powder, according to AIFI chairman Innocenzo Cipolletta (pictured), perhaps it is time for GPs to throw themselves into the hunt for investment opportunities.

Of course, the indigenous market is not without its challenges, which continue to change in order of significance according to a survey conducted at the conference by Maurizio Delfino, partner at Studio Legale Delfino e Associati Willkie Farr & Gallagher. Earlier this year, the availability of debt was the primary source of concern, and indeed one felt across Europe as banks reduce their exposure to alternative assets. Now though, concerns seem to be more adapted to the country's unique challenges.

Heading the list of concerns for Italian GPs is portfolio performance in a tough economic climate, while a more Italian-specific challenge followed: differentiating the country from its southern European neighbour, Greece, in terms of perception. Italian GDP is actually more aligned with that of the UK, not Greece, and the country has a reasonably stable banking system that has not required help; high public debt is its Achilles heel. Italy's greatest challenge is perhaps more public relations than leveraged finance.

"Another problem is the valuation gap," highlighted Dimitri Christopher, head of Italian private equity and partner at PricewaterhouseCoopers. "We are seeing buyers discounting for the macroeconomic scenario, and sellers with unrealistic evaluations, which are based on prior multiples and their views for the future growth of the company." This gap is as much as 30%, according to survey results at the conference.

The road ahead will of course be rocky, but with almost half of GPs in attendance looking to divest around 10% of their portfolio, a handful of profitable exits could be just what is needed to smooth the way for the staggeringly high 83% of GPs who expressed their intention to begin fundraising next year.

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