A mixed bag ..

01 November 2008

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The mid-market continues to drive activity in Southern Europe. Though this is the case throughout the region, the story is very different for Italy than it is for Spain. This year alone, despite a deteriorating economic backdrop, Italy has clocked up a mega deal with the EUR1bn buyout of Technogym led by Candover in June; impressive considering the dearth of sizeable deals done elsewhere. In fact, the top seven deals in Southern Europe all hail from Italy (see table).

The value of deals in Italy has been bolstered by a few large transactions but activity is still largely driven by the region's mid-market. The lack of liquidity is reflected in the number of large deals completed. These represent around 30% of the deal volume in both Italy and Spain, according to figures from the Italian and Spanish venture capital associations (AIFI and ASCRI) respectively.

Italy paints a less rosy picture in terms of its legal and tax environment. The EVCA Benchmarking of European Tax and Legal Environments released in October, showed Spain ranked sixth while Italy came in 18th of 27. While there is higher investment value in Italy, the research published by EVCA shows that overall Spain has more successfully implemented measures incentivising investment. The variation between dealflow and split among the different stages of investment is the product of the legal and fiscal framework operating in each country.

"The disparity in investment value between Spain and Italy is due to a few larger transactions more than to a better investment context" comments Emidio Cacciapuoti, partner at SJ Berwin's Milan office; "so the results for the first half of 2008 don't relate to the reality of the Italian investing legal and fiscal framework."

The large deals which Cacciapuoti refers to include Italy's Wind Investments (Apax, Madison Dearborn, TA Associates) and Technogym (Candover), both hitting the EUR1bn mark, followed by Giochi Preziosi (Clessidra) at EUR740m. These were far ahead of those in Spain, such as Ibersuizas' Veinsur or Mercapital's Bodybell, which were situated around the EUR300m mark, followed by GE/Landon's investment in Fotowatio at EUR225m.

The EVCA survey supports this view. "Since the introduction of the Private Equity Act 25/2005, Spain has successfully implemented measures more conducive to investment. The Spanish fiscal/legal environment offers a less burdensome framework to investors, with favourable investment conditions for LPs (pension funds and insurance companies)," asserts Manuel Garcia-Riestra, associate at SJ Berwin's Madrid office. Prior to 2006, Spanish insurance companies could not invest in Spanish PE funds while Spanish pension funds had restricted access.

Today, Spanish insurance companies can invest up to 10% of their assets in PE funds (domestic and international) and 5% in one single entity. Meanwhile, Spanish pension funds can invest up to 30% of their assets in domestic and international PE funds with 20% in one single Spanish PE fund or 5% in an international PE fund. In either case however, investments into OECD-based PE funds in some countries are restricted since these are considered as tax havens by Spanish authorities. The country does nevertheless offer PE and VC tax incentives; qualifying investments in Spain and abroad are effectively tax-free.

It is important to bear in mind the limitations of the data sets represented in the EVCA benchmark and the AIFI and ASCRI statistics. The former is broad ranging and is strongly based on the investment tools available. The latter is limited to the information released to both associations by their members. Inherently, the relationship between a state's regulatory backdrop and its incentivisation of innovation, business and private equity is complex and statistics have to be used in moderation.