Italian private equity urged to address communication issues

Though a headline-grabbing six-year recession may have come to define the Italian economy in recent years, the country's statistical breakdown is far more promising. Italy is the eighth-largest manufacturing economy in the world, ranks second among the leading export economies in Europe, and has significant clout in the food, fashion, furniture, design and fabricated metal products sectors.

And yet, despite boasting all the ingredients for success and painting an alluring picture for private equity investors, Italy has been home to just 3.9% of European dealflow this year and fundraising remains a major challenge.

"The Italian GP community suffers from an inherent lack of communication with Anglo-Saxon investors," said one adviser at a conference exploring Italian opportunities held last week by UBS and Aifi. "We have to act as educators of our US clients with regards to Italy, and yet our perception is that it's a really interesting place to invest at the moment."

The case for Italy has been obscured by macroeconomic woes and political sagas of late - for the vast majority of pre-crisis LP commitments provided by national banks, foundations and insurance companies, international misconceptions were less of a worry. But as traditional investors in private equity funds fall by the wayside, are GPs doing enough to remove the obstacles in their control and smooth the fundraising path when it comes to international investors?

"It was staggering when we started our fund-of-funds activity. It was impossible to have a complete PPM with a complete due diligence package, with the exception of a few GPs," explained Luigi Tommasini, senior partner and head of indirect investments at Fondo Italiano di Investimento. "We have invested in 20 funds, and in a lot of cases, we had to help them build their own PPM in order to go and fundraise. But that was not because of the GPs; they were very comfortable with a market that was more relationship-driven. At the end of the day, it doesn't change anything because it's all about trust, but Anglo-Saxon and foreign LPs give trust through facts."

Though Italian GPs may do well to heed Tommasini's call to present the data and facts "using the language that foreign LPs understand", structural challenges remain, according to one placement agent: "LPs are used to certain terms and fee structures and a particular way of setting up funds. Italian GPs need to fall in line with international standards." Italy is perhaps one of few countries to welcome the onset of incoming regulation with its inherent standardisation requirements. But assuming that the GP community can address the "packaging problem" cited at the conference, are returns prospects strong enough to entice LPs back into the market?

Returns policy
According to data produced by KPMG, returns are at the highest point since 2008 with investors enjoying an average IRR of 18.2% in 2013 - almost treble the 6.2% average IRR in 2012. Several players exceeded the average figure in recent times, including Carlyle, which has had a presence in Italy since 1998. "It has been one of our most successful countries," Carlyle director Filippo Penatti said at the conference.

Moncler in particular proved to be a highly successful investment for Carlyle, with the jacket maker becoming Europe's strongest market debut when it listed at the end of last year. The GP first backed the asset in 2008, taking a 48% stake in a deal valued at around €200m including equity and debt. The transaction was supported by an all-senior financing package with leverage of 3-3.5x EBITDA, according to unquote" data. Funds managed by Mittel, a former shareholder, retained 14% with the remaining stake held by entrepreneur Remo Ruffini.

"We encouraged the company to adapt the management practices of a public company right from the start," explained Penatti. A dual track process was initially explored, with interest coming from Asian funds and traditional private equity funds while an IPO remained a viable option. Eurazeo emerged victorious in 2011, taking a 45% stake in Moncler in a deal that gave the group an enterprise value of €1.2bn, or 12x EBITDA. The transaction saw existing shareholders Carlyle and the firm's chairman and creative director reduce their stakes in the company to 17.8% and 32% respectively. Mittel retained a 5% stake. "Eurazeo was willing to enter with similar governance rights to Carlyle," said Penatti, highlighting the smooth transition in the company's shareholding structure, which saw Carlyle enjoy a 2.43x money multiple.

Carlyle took the decision to split the Moncler brand from other brands within the company, creating two divisions that later became separate legal entities. In 2013, Moncler sold Industries Sportswear Company to Emerisque Brands UK's Cavaliere Brands. The company's backers then set about an insourcing strategy, converting distribution agreements into a joint venture in Japan and opening new stores. A dedicated structure was established in China and a strategy developed for entry into US markets. "We took disciplined investment decisions," said Penatti. "And direct retail sales grew from 13% in 2008 to 57% in 2013." Sales in Europe - excluding Italy - Asia and North America grew by 4x, 6x and 9x respectively.

In late December 2013, Moncler floated on the Milan exchange in a listing that was 30x oversubscribed. On the first day of trading, shares were up 40% on the pre-opening price, valuing the company at around €3.6bn. And in mid-June 2014, Carlyle sold its remaining 7.13% stake in the firm for €215m, enjoying a 5.69x money multiple and an IRR of 57%. With such strong returns a possibility in the bel paese, LPs will no doubt be more forgiving of Italian idiosyncrasies and tempted by average acquisition multiples of just 6-7x EBITDA.

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• Topics
• Southern Europe
• GPs
• Italy
• AIFI
• Fondo Italiano di Investimento
• KPMG
• Carlyle Group
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