VZCZCXRO1149
RR RUEHFL RUEHNP
DE RUEHMIL #0096/01 1181616
ZNR UUUUU ZZH
R 281616Z APR 09
FM AMCONSUL MILAN
TO RUEHC/SECSTATE WASHDC 1753
INFO RUEHRO/AMEMBASSY ROME 8789
RUEHFL/AMCONSUL FLORENCE 0206
RUEHNP/AMCONSUL NAPLES 0204
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 MILAN 000096 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON IT
SUBJECT: PRIVATE EQUITY IN ITALY: GROWING, BUT IN THE RIGHT 
DIRECTION? 
 
REF: MILAN 78 
 
¶1. (SBU) Summary: Even in the midst of economic crisis, 
Italy's small private equity (PE) marketplace is expanding. 
Larger multinational PE firms and those in search of 
"mega-deals" are playing a smaller role, but local PE outfits 
see a potential for smaller, less-leveraged, longer-horizon, 
"buy and build" deals.  Private equity financiers view the 
country's thousands of privately held small and medium 
companies as ripe for the picking as their traditional 
sources of bank credit get scarcer.  On paper this rings 
true, but we think PE practitioners, with their war chest of 
eight billion euro, may be overly optimistic that these 
small, conservative firms will be open to private equity 
partnerships.  Meanwhile, venture capital -- where there are 
plenty of start-ups looking for cash -- remains a neglected 
(though growing) part of the market place.  End summary. 
 
Italian Private Equity Defies European Trends 
 
¶2. (U) There has been much debate over continued access to 
credit for the export-focused small and medium enterprises 
(SMEs) that dominate the northern Italian economy.  Indeed 
the Italian government has focused many of its crisis 
response measures on this very issue.  As noted in reftel, 
the global economic crisis is destroying, to varying degrees, 
the traditional markets of these SMEs and the talk is turning 
toward the need for fresh funds for companies hit 
particularly hard -- especially if the crisis lasts beyond 
¶2009.  Though much of the discussion has focused on the 
willingness or lack thereof of traditional banking partners 
to keep lending, the private equity (PE) sector is also 
presenting itself as a logical partner for these firms. 
 
¶3. (U) Much like its banking sector, Italy's PE market is 
smaller and less-developed than others in Europe.  According 
to 2008 data, funds collected by Italian operators amounted 
to only 2.2 billion euro (down from three billion in 2007, 
and a tiny fraction of the 69 billion euro collected in 
private equity funds across Europe in 2008).  The Italian 
Association of Private Equity and Venture Capital (AIFI) also 
includes in its data on collections an additional 2.3 billion 
euro invested in the country by pan-European funds with a 
base in Italy.  However, the PE market's small size and 
relative lack of exposure to risky investments, again like 
that of the banking sector, may be contributing to its 
resilience.  Despite the ongoing financial crisis, Italian PE 
investment in 2008 was at an all-time high -- with the number 
of deals (372) and the value of new investments (5.5 billion 
euro) up significantly from 2007.  According to our sources 
here, the 30 percent increase in the value of new PE deals in 
2008 compared very favorably with France, Germany, the UK, 
and Spain -- all of whose PE markets saw drops of between 20 
and 40 percent in 2008. 
 
New Playing Field Suits the Locals 
 
¶4. (U) According to practitioners, with the ongoing global 
economic troubles the scope of private equity deals in Italy 
(which are concluded predominately in and around Milan) is 
evolving rapidly and a distinctly Italian model of private 
equity could emerge.  This transformation is being expedited 
by the end, for now, of the era of the "mega" buy-out deal 
which had been dominated by major international or 
pan-European PE players.  This had been an increasingly large 
part of the Italian PE marketplace through 2008.  Symbolic of 
this shift, we have in the last weeks heard of two large 
pan-European PE firms looking to reduce staff or up-stakes 
entirely from Milan.  Another feature of the evolution is a 
lengthening time horizon, with preferred investment periods 
now 4-6 years rather than an average of 2 years, the norm 
during the 2005-07 boom time.  Also shifting is the balance 
of equity and debt, with a prediction that new deals will be 
structured to include upwards of 50 percent equity investment 
(up from 36 percent in 2007) and debt/EBITDA ratios (already 
lower in Italy than on average in the rest of Europe) down 
from 5:1 in 2007 to below 3:1 on average. 
 
¶5. (U) Another clear picture emerging in Italy is in the 
preferred type of private equity investment. About 80 percent 
of PE funds collected in 2008, as in the last five years, 
went toward buy-outs or expansions of existing firms -- the 
more conservative of PE ventures.  Early-stage investment 
(seed and start-up investments) is expanding rapidly with a 
steady increase in both the number and value of deals in the 
last five years.  In 2008 this segment of the market 
witnessed a jump of 75 percent in the amount invested. 
 
MILAN 00000096  002 OF 002 
 
 
However, the numbers remain very low compared to the rest of 
Europe.  Even with the near doubling of the size of the 
market from 2007-08, the value of such deals was still only 
115 mln euro.  Meanwhile, in 2007 and 2008 the number of 
early-stage investments remained the same (88) while the 
number of start-ups involved actually went down from 68 to 
¶67. Also disappointing when looking at this crucial segment 
is the persistent reluctance of banks, country funds, and 
asset management funds (SGRs) to invest.  In 2008 the 
country's tiny number of VC funds and the smattering of funds 
operated by city or regional governments made nearly 80 
percent of early-stage investments. 
 
Aim Small, Reduce Risk 
 
¶6. (U) Some homegrown private equity fund managers have told 
us that the new reality suits them, and their narrower 
ambitions, just fine.  One company told us that for 2009, 
their target was to raise around 50 million euro with which 
it would seek out opportunities in companies with fewer than 
250 employees and sales of 50 million euro.  The consensus is 
that within these parameters, there should be ample targets 
-- family-owned companies that want to grow or innovate their 
way out of the crisis or who are facing "succession problems" 
(figlio doesn't have the business savvy of padre).  The 
increased equity stakes and longer investment horizon lend 
themselves to the "buy and build" focus, that, in the 
atmosphere of very weak IPO opportunities, seeks to build up 
small firms into globally competitive operations that will 
eventually be resold. As one private equity professional told 
us, PE firms could start taking the place of the local banks 
who for decades have been as much strategic partners as 
purely creditors. On the other hand, this similarity of 
function has made it difficult for PE firms to explain to 
skeptical SMEs that they offer more than the neighborhood 
bank. 
 
¶7. (U) Beyond these new targets for investment, however, it 
seems purely Italian domestic operators will retain their 
reputation for caution.  For instance, though a small handful 
of the savvier, more international firms are looking at 
distressed/undervalued assets as a tremendous opportunity, 
the consensus for now seems to be that such comparatively 
risky investments are to be avoided.  One senior official at 
AIFI said recently that in the absence of good traditional 
deals, Italian funds will be content to spend their time this 
year managing their existing portfolios of nearly 1,200 
companies valued (at acquisition price) at 16.7 billion euro. 
 
Comment: Unrequited Love? 
 
¶8. (SBU) The Italian private equity sector has held its own, 
and there is optimism in the industry about "Italian style" 
PE flourishing during the tough times and into the future. 
We hear a consensus that, so long as the stock market is 
weak, and local institutional investors are solvent, reduced 
international attention on Italy shouldn't hurt fund inflows 
too much.  Indeed, the sharp reduction in international flows 
to Italian PE, already seen in 2008, has been compensated so 
far by increased capital flow from domestic investors 
(institutional investors, family firms, and other company 
funds).  Private equity professionals here also stress the 
7.5 billion euro already in the coffers of local PE firms 
that are available for well-positioned investments. 
Unfortunately, PE firms may have trouble finding outlets for 
this money.  While a boom in venture capital deals with the 
country's many cash-starved start-ups could happen, this 
sub-sector is still minuscule in Italy and access by 
entrepreneurs to such financiers remains harder than it 
should be.  Also, it makes sense in principle that as 
traditional banking relations fray, SMEs with sound business 
models would want to seek PE expertise and financing to deal 
with the current crisis.  However, the apparent optimism and 
readiness of private equity funds to get involved in existing 
firms is not necessarily going to be matched by a willingness 
on the part of privately held SMEs to accept even a modicum 
of outside control.  Those SMEs with whom we've spoken have 
been uniformly unimpressed with, and even suspicious of, the 
idea of taking on a strange partner and are looking at all 
other solutions first.  Unfortunately, many SMEs may not 
accept the notion of PE involvement until they are on their 
last legs; a point at which PE funds (whatever their style, 
philosophy, or national origin) may no longer be interested. 
WEYGANDT