Weathering the storm

Speaking at the second annual Southern Europe unquote" Private Equity Congress in Milan, on 26 November, PricewaterhouseCoopers partner Mara Caverni emphasised the cautious optimism that is currently prevailing in the Italian market, a stark contrast to the trend being across the continent at large.

Private equity across Europe is to a great extent dominated currently by terms such as deleveraging and recession, and investment activity has slowed considerably. However, in Italy the story is very different. "In the first six months of 2008 investment levels reached 67% of the total 2007 value," Caverni noted. "The Italian market is an attractive one, and the recent LBO of N&W Global Vending is a sign of this."

Though this optimism is tempered by realism, with many in the industry predicting a slow start to 2009, there is a general consensus that the long-term prospects are bright and that the outlook for H2 2009 and 2010 remains positive. "Difficult times are complex, but complexity offers great buying opportunities," said Marco Fumagalli, head of 3i Italy. "Our best year in terms of returns was 2002, right after 9/11."

However, private equity houses are aware that they will also have to go on the offensive to make sure that their portfolio companies do not become victims of the tougher economic climate over the next 18 months. Buy-and-build and capital expansion in particular appear to be the favourite investment strategies at this time, as they require little to no financial leverage. "Buy-and-build has always been a value creating tool," confirmed Permira's Gianluca Andena, "distressed companies present a good add-on opportunity for young companies in the portfolio, as do good companies facing limited access to funding for growth."

"The picture painted before us is partly grim as we have no indication of when the downturn will end, but it will end and the times ahead present good opportunities for corporate/PE partnerships," added Claudio De Conto, COO and general manager at multinational Pirelli & C. "The synergies that ensue from such partnerships will increase the credibility of the deals being made."

Against a deteriorating economic backdrop, Italy has stood out as a resilient geography. In fact, the top seven deals in Southern Europe over the last year all hail from Italy. Earlier this year we saw the EUR1bn buyout of Technogym led by Candover. In late November, Barclays Private Equity and Investcorp raised an impressive EUR600m towards the EUR800m buyout of N&W Global Vending - not only is this a sizeable sum, but it came towards the end of the year, when most wrote off leverage as "done" for 2008.

However, the N&W deal is also a good example of the lack of confidence debt markets are going through nowadays. "A Mandated Lead Arranger (MLA) is no longer providing 100% of the commitment. A decreasing appetite for underwriting has resulted in an increased syndication and widened MLA pools. This in turn is reflected in the negotiations, which are more complex, given the number of financing parties involved," stated Daniele Candiani, managing director of IKB Deutsche Industriebank. "Yet banks are set to assume a changing role, they will cease to simply be underwriters and bookrunners. With their knowledge of deal structures and sector dynamics, banks will be well-placed to maintain dialogues with sponsors and manage any arising conflict," he added.

As for secondaries, 2009 will also present opportunities, as GPs and LPs alike feel the pressure of the current economic and financial crisis on their portfolios. LPs, especially pension funds and endowments, have seen their funds shrink, forcing them to juggle their allocations to guarantee they are covering areas of the market with the greatest growth potential in the long-term. This will have an impact on their capacity to honour their commitments and may result in GPs instigating sales (after the event, Permira offered its LPs an opportunity to scale back their commitments by up to 40%). "Buyers will have the upper hand and they will be seeking the best assets available. They will be extremely selective in their business, dealing with realistic sellers. Timewasters need not apply," said Marleen Groen, CEO at secondaries specialist Greenpark Capital.

Expectations for the year ahead are that it should prove a good vintage, provided market volatility decreases, allowing prices to be more accurately set. Large funds could have the advantage, but more stringent terms for debt mean that investors will have to increase their equity share or take minority positions financed mostly via equity. The storm is far from over.

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• Southern Europe