Managing Member of Protostar Partners
by Joseph Haviv, Managing Member of Protostar Partners
You have heard before. That often repeated mantra of “Italy? Impossible to make money in that country: stick to food and wine, much safer”. How truthful and realistic is such an assessment? Can and should such stereotypes be debunked? How to safely navigate the ecosystem? Such might be the themes roaming in investors’ mind as they consider Italian private equity opportunities.
First, investment opportunities abound, but there are distinct segments to be understood. Larger deals, $1 Billion and up in size, are few and far between: many successful companies having been picked already, and many more acquired by larger strategic players. A dramatically different scenario in the middle market space. This is where the real economic strength of the country lies: largely concentrated in the north-east of the country (Lombardia, Veneto, Emilia areas with GDP rates at the top of the European scale), growing substantially in numbers in the center (e.g. Marche), and even expanding in the much beleaguered south (e.g. Campania, Sicilia). Privately held, undercapitalized, global skills deprived, and facing generational changes many successful enterprises face limits to growth, yet could benefit greatly from a Private Equity firm’s capital and skills infusion.
Second, where and how to access. Whereas traditional investment bankers are buoyant successful intermediaries, much of the early overtures on transactions happen through lawyers and “commercialista”. More than an accountant or bookkeeper, these professional figures are the true trust-based-advisors of Italian entrepreneurs: the ones that have helped navigate tax, banking, and reporting matters. Every industrial hub has a few dominant commercialista figures: the challenge lies in finding them.
Third, what to expect and a few pointers on execution. There are distinct difference between large deals ($ 250 million Euro on up) and the bread and butter mid-market cohort, especially with regards to financing. Burdened by complex systemic issues, commercial banks are somewhat stingy with debt leverage. Mezzanine capital providers are few, and uni-tranche players a bit of a rarity. Minority transactions abound, often structured with put-and-call 5-year protection mechanisms. Yet, properly guided through international expansion and professional management, Italian mid-market companies can and have delivered highly attractive returns.
A couple of pointers on the surrounding legal landscape. Changes in legislation have facilitated operational optimization. The reform of the labor and of the bankruptcy codes have greatly enhanced actionable degrees of freedom. The introduction of special tribunals has offered a much swifter resolution to pending industrial litigations. And it is highly likely that, in the not so distant future, banks will finally restructure their private debt holdings, thus creating many opportunities to reshape enterprises.
In sum. How to win? Adapt your systems and practices to local conditions: cookie cutter approaches will not succeed. Build a tangible local presence: an entrepreneur holds the company as dear as his siblings and personal touches matter a lot. Diligence thoroughly and protect your investment, perhaps through Arbitration resolutions in the UK or in Switzerland. And, yes, do enjoy the wine, the food, and much more.