Second 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. 18 of 24 February 2023
by Stefania Peveraro
The weight of private equity in the m&a market remains important in Italy. According to EY analysts, we are talking about 40% of the total number of deals in 2023 and a value of EUR 38.5 billion out of a total of EUR 58.6 billion, similar percentages to that of 2022, although decreasing in absolute terms (EUR 65.4 billion out of a total of EUR 93.7 billion), as did all m&a activity at an international level last year. But in reality, the true figure is even higher, because the value of transactions is not always disclosed. It was mainly add-ons, i.e. acquisitions made by funds’ portfolio companies, that made up the bulk last year. This is a type of activity that funds will continue to pursue in the coming years, and which is considered an essential growth strategy by most operators, especially in Italy, where many sectors still see the presence of many small companies and therefore have significant room for aggregation and growth policies.
This was told to BeBeez by Marco Ginnasi, EY Strategy & Transactions Private Equity Leader Italy, on the occasion of the second episode of EY M&A Compass, the in-depth analysis of the Italian M&A market developed by EY together with BeBeez. A theme, that of add-ons, which had already emerged in terms of the number of deals also from the latest BeBeez 2023 Report dedicated to private equity (available to BeBeez News Premium and BeBeez Private Data subscribers), which out of a total of 549 deals between investments and divestments, mapped as many as 207 deals on Italian target companies and another 46 deals on foreign companies, meaning that just under 50% of the total investments in 2023 were buy-and-build deals. Ginnasi therefore draws a positive outlook on the m&a and private equity market in Italy, despite the considerable challenges to be faced given a very complicated and evolving geopolitical set-up.
Question. How did the Italian m&a market perform in 2023 compared to the international one?
Answer. In Italy in 2023 the market expressed a solid trend in investment activity: there were approximately 1,210 deals (substantially in line with 2022) and reached an aggregate volume, where available, estimated at approximately EUR 58.6 billion. Of course, this is down from 2022, but I recall that in the two years before, the level of m&a activity in Italy, both in terms of number of deals and volume, had experienced a real boom due to the recovery of transactional activity after the pandemic period, while last year it was the low incidence of megadeals that weighed on the statistics by value. Looking at what happened in Europe, the Middle East, India and Africa, the picture was not much different: activity did not accelerate, but remained sluggish for most of 2023, with 15,468 transactions totalling almost USD 991 billion, registering a 16% drop in transaction volume and 22% drop in transaction value compared to 2022. The decline, however, was mainly due to the slowdown in activity in the first half of the year while it stabilised in the second half.
Q. How much did private equity activity in Italy weigh in this picture?
A. The role of private equity as an investor has grown further in importance, with an estimated 40% of total deals. The total value of acquisitions by private equity funds in 2023 reached, where widespread, about EUR 38.5bn, lower than in the same period in 2022 (about EUR 65.4bn). There are several reasons for this decline: the climate of geopolitical uncertainty led to more cautious investment choices, with a smaller average deal size. In this context, mid-market funds played a significant role in keeping transactional activity in Italy solid. In particular, there has been an increasing incidence of so-called add-ons, realised by the funds’ portfolio companies, a trend that we expect will continue, with investee companies maintaining the add-on strategy as one of their pillars of growth.
Q. Which sectors are favoured by private equity investors in Italy?
A. The changed macroeconomic scenario has led to a slight shift in acquisition sectors. A comparison of the number of deals by sector made by private equity in 2023 and 2022 shows that the industrial sector is by far the most preferred sector for funds, partly due to the high quality of Italian companies in this sector and their increased export capacity: the percentage incidence of the industrial sector has increased from 22% to 28%. The consumer sector saw the incidence of deals fall from 17% in 2022 to about 15% in 2023, due to uncertainties on demand and the related difficult forecasts in the short and medium term. Deals rose in both the energy & utilities and business services sectors.
Q. How will this year go? Internationally, will we see more or less private equity and m&a activity in general compared to 2023?
A. Internationally, there are many signs of market recovery during 2024. The CEO Outlook Pulse, conducted by EY last January on a significant panel of global ceo and private equity leaders, highlighted how the imperative of business transformation is driving companies to accelerate their growth plans, with m&a as one of the key pillars. Also according to our privileged observatory, ceo and private equity leaders indicate how megadeals, which were missing during 2023, will become relevant again during 2024.
Q. And in Italy?
A. The feeling is the same. Even the Italian private equity leaders surveyed for the research expect a moderate recovery in terms of volumes, especially if supported by more stable interest rates and inflation. In support of this view, there are several factors to consider. Firstly, the challenge of business transformation by Italian companies, which cannot ignore the issues of digitalisation (generative AI) and energy transition, will stimulate the entry of private equity funds into Italian excellences as enablers and accelerators of change. Secondly, it should be considered that the significant dry powder (over USD 1.5 trillion globally) available to funds will continue to give a strong push to private equity operators even on Italian targets, given the increasing interest in the Italian market by international operators. I have already mentioned the increasing m&a activity by the funds’ portfolio companies, which will continue along this path. And finally, there is the issue of the vintage of portfolios on investments already made by funds, which is currently slightly longer than in the past (due to Covid and geopolitical factors), so that in the near future it is reasonable to expect the start of exit processes that have been postponed until now.
Q. On the sector front, which sectors will be the hottest for m&a this year?
A. Definitely still the industrial sector, the backbone of Italy’s economic fabric. It is a sector in which funds are looking for Italian excellence to enhance, aggregate, and grow in order to make them globally competitive. In this vein, there are a number of platform initiatives, which we see funds increasingly focusing on as a promoter and enabler for consolidation. And we return here, not by chance, to the theme of add-ons as a privileged tool for growth and value creation by private equity in Italy.
