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Panellists at the unquote" Italia Private Equity Forum have argued that as the country’s economic recovery continues to strengthen, private equity funds are facing higher competition and rising valuations. Alice Murray reports live from the event
Speaking on the Leaders' Debate panel at the unquote" Italia Private Equity Forum held today in Milan, CVC partner Giampiero Mazza said: "Today, valuations in Italy are high. Lots of new interest in the country has been driven by macro improvements, so it is becoming a tougher market."
Indeed, Italy's recent government reforms, discussed in detail by keynote speaker Alessandro Aresu of the Italian Ministry of Economy and Finance, have created a business-friendly environment of relative political stability. The reforms are focused on creating a more efficient banking system, a more flexible labour market and an improved civil justice system. And, according to Areso, the OECD has stated that if Italy continues with these reforms and adopts them swiftly, the country's GDP will grow by 3% over the next three years.
While it is deeply encouraging to witness continued economic recovery in Italy, this could cause local GPs difficulties. Maurizio Bottinelli, head of the investment team at Clessidra, agreed that valuations are high but believes that private equity can still find opportunities outside of auctions. "In Italy, you can be selective and you can take time to create your own opportunities by working with entrepreneurs. If you have a good team on the ground you can make distinctive deals, more so than in other markets," he said.
But for Giovanni Orsi, principal at Coller Capital, private equity's golden opportunity in Italy is over: "For strategic investors, it was better to be here in 2012 and to take that risk. Today, it is harder; there is more competition and prices are going up."
Charterhouse partner Giuseppe Prestia also sees higher valuations but does not believe this is enough reason to stop investing in Italy: "For us, we are invested in companies for four or five years. We believe in platform plays, and our deal pipeline, in terms of family owners looking to partner with us, is extremely high. So we are very confident that we will have another direct deal in Italy in 2016."
Bottinelli stressed the importance of value creation over simply looking for low prices: "Of course, we are always looking to buy low and sell high; and we only want to use moderate levels of leverage. But the key is to find value in companies, and working closely with management is vital to do this."
CVC's Mazza pointed out that as well as rising valuations, another developing challenge for Italian GPs is selection: "Valuations are high but alongside this there is also less discrimination between good companies and mediocre ones. Add to this increased competition from newer players such as hybrid hedge funds, meaning there is lots of money out there – this is forcing us to be more careful when it comes to selection."
Due to the increasingly challenging environment in Italy, Mazza explained that CVC is looking for more complex situations such as carve-outs or creating businesses from scratch with experienced management teams. "Earlier this year Clessidra beat us on this kind of deal – ICBPI – ultimately the company went for a higher price but there are lots of opportunities to grow this company, and these are the kinds of opportunities we see in Italy. But we stay away from classic deals that are easy to value," he said.
Despite increased competition causing higher asset valuations, the fundraising environment for Italian and pan-European GPs remains buoyant. Orsi went on to explain how the current environment is creating compelling opportunities: "International LPs, from looking at historic returns data, expect private equity portfolios to return between 11% and 15%; these are returns they are unlikely to achieve in any other asset class. And a lot of these investors are under-allocated to private equity – especially insurance funds, so that creates a willingness to invest.
Furthermore, southern Europe is coming back onto people's radars; a lot of US investors are coming back to Europe. All of these factors are helping fundraising."
Orsi sees two main strategies US investors are using to access the European private equity market, with some investing directly into smaller, more local players: "A lot of US investors have done this in the Nordics and are now replicating it in other European markets." The other is to invest in larger pan-European funds in order to achieve full coverage.