Third episode of EY M&A Compass, the in-depth look at the Italian M&A market developed by EY together with BeBeez
Article published in BeBeez Magazine no. 19 of 23 March 2023
by Stefania Peveraro
Historically, entrepreneurs preferred to talk to other companies or larger industrial groups, convinced that such investors were better able to appreciate an acquisition from a strategic point of view, thus bringing industrial value. However, by 2023 private equity penetration within the m&a market had reached 40 per cent in terms of number of deals and exceeded 65 per cent in terms of value (see the second installment of EY M&A Compass here). But this is also because “we are witnessing a progressive broadening of the concept of private equity, in the sense that today at least one third of the deals realised by financial sponsors have been carried out by private capital operators other than classic funds, some of which operate with a patient capital logic and therefore offer companies capital that is increasingly suited to support long-term growth with an approach of creating value over time”. This was underlined by Renato Salsa, Corporate Finance Leader, Strategy and Transactions of EY in Italy, on the occasion of the third episode of EY M&A Compass, the in-depth analysis on the Italian M&A market developed by EY together with BeBeez
Clicca above to see the third episod of EY M&A Compass
with Renato Salsa, Corporate Finance Leader,
Strategy and Transactions di EY in Italia
Question. Is private equity investors’ approach to investing in Italy changing?
Answer. Absolutely. In general, financial investors are interested in value creation through four main modes of operation: arbitrage on multiples, leverage arbitrage, enhancement of company performance or add-ons. The current market environment, characterised by stable or slightly decreasing multiples and a higher cost of debt than in past years, reduces the scope for value creation centred on multiple arbitrage and deleveraging and forces private equity players to work more and more on the portfolio, with a view to improving corporate performance and buy-and-build, i.e. to build industrial clusters. Thus, from a certain point of view, transactions with a high industrial content are being carried out not only by strategic investors, but increasingly also by financial investors. In this sense, they are similar in investment philosophy to strategic investors, who by definition evaluate an acquisition mainly with an industrial eye, trying to understand whether and in what terms a given company can be consistent with its industrial strategies and what is the actual likelihood of being able to extract cost and/or revenue synergies from a subsequent operational integration.
Q. But at this point, can it be indifferent for an entrepreneur to choose a strategist rather than a fund as an investor, if the fund acts from an increasingly industrial perspective?
A. In the choice of opening up the capital of companies, there is no absolute optimum investor, but a certain investor may be more or less ‘right’ depending on the characteristics of the company, the entrepreneur’s objective, and/or the need for support in growth and development operations (generational change, managerialisation, internationalisation, corporate governance, process optimisation, cross-selling, etc.). The motivations that lead an entrepreneur to consider opening up his company’s capital can be the most diverse. It is not an easy choice, of an extraordinary nature, involving family, personal and economic balances. Ultimately, in order to decide which type of investor is preferable, attention must be paid not only to the entrepreneur’s objectives, but also to the nature and specificities of the investor, mainly in terms of investment strategy, and, above all, it must be ensured that there is a full and profound alignment of interests between the parties. And this should be the main goal of an M&A advisor.
Q. Can the choice also be influenced by the type of flexibility the buyer may have in structuring the deal?
A. Also. To the advantage of private capital operators there is the fact that today a deal can envisage a very broad panorama of solutions. One can imagine minority or majority operations up to full acquisition, with different deal structures (LBOs or capital increases) and payments (with forms of deferred payments, which include an earn-out) and in relation to different levels of capital structure, so one can imagine pure equity operations, or hybrid capital, mezzanine debt and so on. Obviously, many investors are specialised in one or more investment modes, but it can be said that the aggregate offer of private equity/private capital operators offers, on the whole, a lot of flexibility.
Q. What are the needs of Italian family businesses? Why are they looking for investors?
A. Italian family capitalism is a solid sector, with quality companies capable of achieving performance levels that are often better than those expressed by other European competitors. At the same time, however, it presents some endemic fragilities, including: a widespread need for generational transitions; closed corporate governance, with a structural lower recourse to external managers by Italian entrepreneurial families compared to foreign ones; small average size, undercapitalisation and high dependence on the banking system. Not only that. These companies must remain internationally competitive and must therefore be able to respond effectively to epochal market changes, such as geopolitical tensions, ecological reconversion, digital transformation, the adoption of artificial intelligence, the reconversion of many production processes, the re-engineering of procurement, and the re-engineering of various products in a more sustainable key. These phenomena are increasingly driving companies to turn to the m&a market. And to do so, they often look for a fellow traveller, with private equity increasingly proving to be a truly competitive alternative to many industrial buyers.
