VZCZCXRO6446
PP RUEHFL RUEHNP
DE RUEHRO #2072/01 2011456
ZNR UUUUU ZZH
P 201456Z JUL 06
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC PRIORITY 5426
INFO RUCNMEU/EU INTEREST COLLECTIVE PRIORITY
RUEHFL/AMCONSUL FLORENCE PRIORITY 1588
RUEHMIL/AMCONSUL MILAN PRIORITY 7385
RUEHN/AMCONSUL NAPLES PRIORITY 1677
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 ROME 002072 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT PLEASE PASS TO EB/CBA FRANK MERMOUD 
ALSO PASS EUR/ A/S FRIED 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV IT
SUBJECT: AMBASSADOR'S PARTNERSHIP FOR ECONOMIC GROWTH - 
OPPORTUNITIES FOR PRIVATE EQUITY 
 
 
¶1. (U) Summary.  As part of the Ambassador's Partnership for 
Economic Growth, Italian and American experts met recently to 
discuss the opportunities and challenges for foreign private 
equity investment in Italy.  There was broad agreement that 
foreign private equity investment in Italy is held back by 
cultural differences, communication problems caused by 
language barriers, and unrealistic expectations by foreign 
investors.  Nonetheless, participants agreed there are 
tremendous opportunities for private equity investment in 
Italy for investors with the experience, patience, and time 
to work with the Italian system.  Although it did not explore 
the technical and administrative barriers to private equity 
investment in Italy, the meeting laid the groundwork for 
future discussions which the Embassy will pursue.  End 
summary. 
 
BACKGROUND - THE PARTNERSHIP FOR GROWTH 
--------------------------------------- 
 
¶2.  (U) Although it is the world's sixth-largest market 
economy, Italian economic growth over the past five years has 
been anemic, averaging only 0.66 percent annually.  GDP 
growth in 2005 was only 0.1 percent, with growth in 2006 
projected to be 1.5 percent.  An independent panel of Italian 
economists said June 5 that Italy's deficit in 2006 could 
reach by year-end 4.1 - 4.6 percent of GDP.  Italy's 
already-high public debt is on track this year to soar to 108 
percent of GDP, and Standard & Poor's and Fitch have both 
threatened to lower Italy's sovereign debt rating from its 
current AA rating. 
 
¶3.  (U)  Slow growth, combined with Eurozone Stability and 
Growth Pact obligations to keep its deficit below 3.8 percent 
of GDP and debt below 60 percent of GDP, mean that the 
Center-Left government faces the daunting challenge of 
meeting growing social, welfare, and health care costs with 
increasingly limited financial resources.  Even prior to the 
election of the Center-Left coalition in May 2006, there were 
signs financial pressures were causing Italy to relinquish 
its role as a leader on the world stage.  The GOI budget for 
FY/CY 2006, for example, cut military spending and slashed 
Italy's foreign assistance budget by 27 percent. 
 
¶4.  (U)  In October 2005, Ambassador Spogli launched "The 
Partnership for Growth," a transformational diplomacy program 
to promote dynamism in the Italian economy.  The four pillars 
of the Partnership are:  (i) to encourage increased 
university-private sector collaboration in research and 
development, strengthening technology transfer and the 
creation of new companies; (ii) to broaden and deepen capital 
markets, especially access to venture capital and private 
equity ("buy-out") funds; (iii) to promote stronger 
intellectual property rights enforcement, thus promoting 
innovation; and (iv) to promote business and student 
exchanges to encourage further innovation and business 
partnerships.  The Partnership, launched in a speech to the 
leadership of Confindustria, Italy's leading industrialists' 
organization, has been positively received as identifying 
ways the private sector can work to energize the economy. 
 
PRIVATE EQUITY INVESTMENT OPPORTUNITIES IN ITALY 
--------------------------------------------- --- 
 
¶5.  (U)  Following the launch of the Partnership for Growth, 
Embassy Rome and the National Italian American Foundation 
(NIAF) collaborated on a meeting of Italian and American 
private equity experts to discuss opportunities for private 
equity investment in Italy by American firms and the 
obstacles that discourage foreign private equity investment. 
On June 20, the Embassy arranged a "Private Equity 
Roundtable," which brought together Italian and American 
lawyers, investment bankers with private equity experience, 
and accountants who have advised foreign investors in Italy. 
 
¶6.  (U) According to a roundtable presentation by Giampo 
Bracchi, President of the Italian Private Equity and Venture 
Capital Association, Italy is ripe for an increase in 
"buy-out" investment, in which an investor buys a controlling 
share in a company from the individual or family owning it. 
Some 58 percent of Italian companies are family-owned.  Of 
these, 52.7 percent are headed by entrepreneurs over 60 years 
of age.  Family-owned companies in Italy have a "mortality 
rate" of 50 percent in the second generation of ownership, 
 
ROME 00002072  002 OF 003 
 
 
and 15 percent in the third generation.  These statistics, in 
tandem with Italy's very low birth rate, illuminate the 
generational crisis among Italian entrepreneurs.  The 
generation which rebuilt the Italian economy after the Second 
World War is now making way for the next generation.  Often, 
however, the owners of these family businesses have no heir 
-- or a willing heir -- to take over the business.  While 
private equity financing offers a way to preserve the firm, 
roundtable participants concluded that private equity 
investment in Italy had not lived up to its potential and is 
not well-understood because of differences in communications 
and corporate culture. 
 
MISUNDERSTANDINGS AND COMMUNICATION 
----------------------------------- 
 
¶7.  (U) Roundtable participants agreed that part of the 
reason that private equity investment in Italy has not 
reached the levels it has in other European countries is 
because of misunderstandings as to what private equity 
investment is and what it can do for a company. 
Traditionally, Italian family-owned businesses remain within 
the founder's family, and Italian entrepreneurs tend to be 
suspicious of external investment sources.  Many Italian 
entrepreneurs believe private equity firms will break up a 
company once they have control, and that selling out to a 
private equity investor will cause the entrepreneur to lose 
control over the company he has spent a lifetime building. 
Many roundtable participants pointed out that while these 
generalizations are true, they are not an exclusively Italian 
phenomenon, and that private equity investment faced similar 
barriers in the United States in the 1960's and 1970's. 
These misconceptions can be addressed through outreach to 
business associations, to which these family businesses 
belong, to improve business owners' understanding of what 
private equity investment is and the positive effects it can 
have for a family business through providing increased 
capital and management expertise. 
 
¶8.  (U) Roundtable participants identified the second type of 
misunderstanding as coming into play after an Italian company 
has decided to enter into buy-out negotiations with a private 
equity firm and when both parties, the entrepreneur and the 
investor, do not make clear at the outset what they want out 
of the investment process.  One participant explained that he 
had spent two years working on a buy-out deal, only to have 
it fall through when the entrepreneur realized the ultimate 
goal of the private equity investor was to take the company 
public.  One roundtable participant stated that "clarity of 
intent avoids 90 percent of misunderstandings." 
 
ITALY IS ON THE CUSP . . . 
-------------------------- 
 
¶9.  (U)  The consensus at the roundtable, among both Italian 
and American experts, is that private equity investment in 
Italian companies is on the verge of taking off.  All foreign 
private equity firms which are already present in the Italian 
market are making a profit here and intend to stay.  Many 
participants pointed out there are many Italian companies 
that are ideal for "buy-and-build" investing.  Furthermore, 
as Italian capital markets grow, there will be opportunities 
for private equity investors to take their companies public 
through a stock exchange listing, the usual progression of a 
private equity investment in the United States. 
 
. . . BUT BUREAUCRACY IMPEDES INVESTMENT 
---------------------------------------- 
 
¶10.  (U) Predictably, roundtable participants lamented the 
effect that the bureaucracy has on investment.  Guido 
Lombardo of the Fortress Investment Group (FIG), stated that 
rules to regulate investment and business transactions 
abound, but are administered arbitrarily, resulting in 
"systematic demotivation" of investors and businesses.  Sarah 
Pinto, an attorney with Latham and Watkins, noted that stock 
exchange listings that should be processed within 60 days are 
routinely delayed by bureaucratic inefficiency.  Other 
participants noted prospective investors can be deterred by 
Italy's bureaucracy, high labor costs, high taxes, and poor 
infrastructure. 
 
¶11.  (U) Comment:  Comments during the roundtable confirmed 
 
ROME 00002072  003 OF 003 
 
 
the conventional wisdom as to why there is not more private 
equity investment in Italy.  What was unique about this event 
was that it brought together key players in an atmosphere 
conducive to a frank exchange of views.  Many participants 
noted that it was the first time that the problems and 
opportunities in Italy had been set out in such a 
straight-forward manner.  Participants said they look forward 
to more technical follow-up discussions. 
 
¶12.  (U) Comment continued:  The roundtable succeeded in 
launching the private equity component of the Partnership for 
Growth by bringing together American and Italian experts in 
private equity, and making the American participants more 
aware of opportunities in Italy and how best to deal with 
obstacles that have discouraged investment in the past.  NIAF 
and the American Chamber of Commerce have begun planning for 
a "private equity fair," to be held in Milan this fall.  At 
the event, private equity companies will explain what private 
equity investment is and how it can benefit privately-held 
companies.  Companies will also present their products and 
business plans.  Organizers hope companies and potential 
investors make connections that lead to investment deals.  If 
the event is successful, NIAF and the Chamber plan to hold a 
series of private equity fairs in different parts of Italy. 
End comment. 
SPOGLI