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Ahead of the upcoming unquote” Italia Private Equity Forum on 4 November in Milan, Coller Capital investment principal Giovanni Orsi speaks to Kenny Wastell about LP attitudes towards Italy and the country’s evolving investment landscape
Kenny Wastell: There are increasingly encouraging signs Italy is seeing the beginnings of an economic recovery. From Coller Capital's perspective, how has LP appetite changed in recent years towards funds investing in the country?
Giovanni Orsi: The economic recovery is definitely helping the perception of the market. When we look at some of our LPs, they are certainly keener on investing in Europe today than they were two or three years ago. These days when we ask what specific parts of Europe they are attracted to, they are starting to mention southern Europe a lot more than 18-24 months ago.
The feeling is that Spain is further ahead in terms of its recovery and the implementation of reforms, but LPs are starting to look at Italy once again also. Funds that have been on the market throughout 2014 and 2015 are seeing more appetite from foreign investors – not only European investors, but North American and Asian investors are also returning. Some are returning with an opportunistic view – capitalising on the ability to acquire assets that are still at decent valuations – and others are doing so with more of a long-term view.
KW: As has been the case across Europe in recent years, entry multiples for Italian companies have been creeping upwards though. What are the challenges faced by GPs in terms of sourcing assets at reasonable valuations?
GO: In 2014, entry multiples were lower than those we have seen in 2015. A lot of international GPs have been coming back to the Italian market in the last two years and that has driven valuations upwards. However, the main challenges and opportunities remain those that are traditionally associated with investing in the Italian PE market.
In particular, you need to be comfortable investing in small and medium enterprises where there are usually strong family ties and you may therefore have to be willing to invest in a minority stake with limited control of the company. If a GP is then able to convert those minority stakes into majority stakes, then the investment proposition becomes even more appealing.
KW: There appears to be a general consensus that good quality Italian companies have a wealth of options when it comes to availability of credit financing. How has this impacted on the role of private equity investors?
GO: Credit and equity-based solutions to finance company growth are complementary rather than mutually exclusive options. In addition to cash, private equity enhances discipline and operational improvement at portfolio companies. Private equity has been successful because of the value it adds for both companies and investors.
KW: Recent changes in legislation have removed legal constraints associated with Italian pension funds investing in private equity. How much of an impact will this have on the industry and over what timeframe will the effects become evident?
GO: I am hoping this will have a great impact. One of the singularities of the Italian market is that many mid-market players are not backed by Italian LPs. If you look at the way the UK private equity market developed it was largely due to the participation of UK pension funds and corporate pension funds. Those types of institutional investors are absent in Italy. The industry has obviously been helped by Fondo Italiano, but now that legislation is more attractive for Italian pension funds and Italian foundations, they will start to actively take an interest in the asset class.
We have seen a few institutional investors starting to invest in private equity but these LPs also need to become familiar with the asset class. They need to develop their own competences in order to understand and be able to value alternative investments. That will take some time, but I would not be surprised if we start seeing commitments from Italian institutional investors – into both Italian and international funds – from next year. They will probably support Italian GPs first, which would be an understandable approach in terms of familiarising themselves with the asset class.