100% Italian-backed B4 boosts small-cap segment

As the crisis rages on, international investors continue to retreat from Italian soil. And, as existing vehicles near the end of their lifespan, GPs are all too aware of the challenges that separate them from the closing of a new fund. It therefore takes gumption to launch a new private equity firm at the heart of the crisis, but that is exactly what has happened.

Founded by former KPMG corporate finance professional Fabrizio Baroni, B4 Investimenti targets small-cap Italian companies with plans for international expansion. According to the firm’s research, 85% of the businesses in Italy generate €10-80m in revenues, though only around a quarter of investors considering Italy as an investment destination focus on that segment of the market.

As a result, the investor argues, the mid- and large-cap segments of the market suffer fierce competition for assets, driving up pricings. Though with the highly-capitalised, super-staffed and hyperactive Fondo Italiano di Investimento operating in the same space, B4 Investimenti may find a competitor.

The new kid on the block of Italian private equity

“It is time for a change in mentality,” said Giacomo Moncalvo, founder and CEO of Migeca, operator of café chain Ca’puccino – the first company to be backed by B4. The dominance of large funds is incompatible with the local business landscape, the entrepreneur explained.

“The banks are not lending, and will never return to how they were before,” he says. “So entrepreneurs are starting to look to private equity.” He explains the dilemma his firm faced amid the relative scarcity of smaller fund managers: pursuing the investment of a larger private equity fund runs the risk of having the relatively small voice of his company drowned out by the collective chorus of a wide-ranging portfolio.

Instead, the entrepreneur put his faith in the new fund manager, attracted by the promise of business guidance as well as equity. In July, the company received a €3.9m funding package from B4 in exchange for 24% of the firm. Comprising a €1.5bn cash injection, a convertible bond worth €1.5m and a non-convertible bond of €900,000, the deal took nine months to complete from initial meeting to close.

The investment was made through the GP's maiden vehicle, which held a first close on slightly more than €20m in April and has an equity ticket of €4-5m per transaction. In total contrast to other local players, the vehicle is 100% funded by Italian investors. And with one in every two LPs to receive PPMs committing to the vehicle, the conversion rate is high.

Also of note is the makeup of the LP base, populated entirely by local entrepreneurs, private equity professionals and other high-net-worth individuals. “We wanted to build up a club of investors, but not in the typical sense of friends co-investing together. That isn’t the correct formula because the standards of professionalism are too low,” explains Baroni. “So we decided to have the rules and governance of international investment funds, which usually include institutional investors, but to raise money from private entrepreneurs or buyout professionals.”

The theory behind the decision to target individuals is rooted in the concept of business guidance. In practical terms, that means that any company backed before the fund's final close has the support of 23 experienced entrepreneurs. The chances are, a handful of them will have had some experience of the challenges they face or the sector they populate. The entrepreneurial element is also an important marketing tool for the new investor, as it tries to lure target companies into its portfolio.

And the LP network is an important source of dealflow for the fledgling firm, allowing it to circumvent competitive auctions. “Almost 80% of the companies we have looked at for investment have come through our LP base, and that is a significant number as we have analysed almost 120 dossiers in less than a year.”

A €40m final close is anticipated in 2014, and while institutional investors are conspicuous in their absence at first close, a handful may be included in the later stages of the fundraising. Their inclusion is pragmatic: “You have to put a limit on the number of people in the fund. 20-30 individuals is manageable, but 50-60 is too much,” says Baroni. “So you have to raise €3-5m from someone.”

Of course, the fund dimension excludes the likes of pension funds and insurance companies. The GP will instead target multi-family offices and small financial institutions with a tight geographical or sector focus. And the vision is long-term; the GP has its sights set on a second vehicle and hopes to dazzle institutional investors into recommitting to a later vehicle.

Carried interest stands at 20% of capital gains, with a higher than average hurdle rate of 8%. “The hurdle rate applies to the total commitment, so only when there is reasonable expectation that investors will see good returns will all members of the investment team have access to carried interest,” explains Baroni. Intentions are good and the investment strategy appears innovative in its simplicity. The GP had better hope that promising beginnings translate into good returns or there will be 23 disappointed LPs knocking at their Roman door.

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