Private Equity and Italy, is it a nice combination?

In this article, Dante MARRAMIERO (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2022-2024) explains about the peculiar situation of the Italian Private Equity market.

Italian conservative market is now opening up

Italy’s family-owned enterprises, steeped in tradition yet poised for transformation, stand at a crossroads of opportunity. For decades, these businesses have been the backbone of the country’s economy, rooted in principles of heritage and resilience. Yet, as the global marketplace evolves, so too must they. Enter private equity – once a distant concept, now a beacon of possibility, offering two distinct paths for growth: co-investment and external capital infusion.

As previously mentioned, family businesses dominate the Italian economy, with around 784,000 companies (nearly 85%) being family-owned according to AIDAF, the Italian Association of Family Businesses. These small and medium-sized enterprises are mainly active in sectors like fashion, mechanical engineering, and food, producing high-quality “Made in Italy” products.

One driver for ownership changes in Italian family businesses is succession planning, as many seek external capital to finance growth, international expansion, technology investments or innovations due to being undercapitalized. Private equity funds have stepped in to provide this capital, with Italy being one of Europe’s most mature private equity markets. As a confirmation of this, annual private equity investments in Italy correspond to around 0.36% of GDP, on par with Germany but lower than the UK, Netherlands, and France.

Key target sectors for Italian private equity include IT/communications and industrial goods. Around 14% of Italian family office assets are invested in private equity, with surveys suggesting most intend to increase these allocations. What could make the difference for the future is that younger generations of Italian wealth holders are expected to further drive family office investments into private equity and venture capital, being more interested in backing early-stage businesses, especially in technology. Their international outlook and experience abroad are also influencing asset allocation decisions.

Co-Investment: Fostering Collaboration for Shared Success

Traditionally, family businesses have been hesitant to engage with private equity, wary of relinquishing control and diluting their legacy. However, a paradigm shift is underway as a new wave of private equity firms sets its sights on these familial enterprises, offering tailored solutions to suit their diverse needs.

Co-investment, as mentioned earlier, represents one avenue for growth. Through co-investment, family businesses can partner with private equity firms to pursue inorganic growth opportunities while retaining operational control. This collaborative approach allows for shared risk and rewards, leveraging the strengths of both parties to unlock new synergies and market opportunities.

External Capital Infusion: Embracing Change for Accelerated Growth

Yet, co-investment is not the only path forward. Another emerging trend in Italy’s business landscape is the willingness of family businesses to open their doors to external capital funding, including partial divestment to private equity firms. While this option may involve ceding a degree of ownership and autonomy, it also presents an opportunity to access significant capital infusion and strategic guidance.

The decision between co-investment and external capital infusion is not a one-size-fits-all proposition. Each option carries its own set of benefits and considerations, depending on the unique circumstances and aspirations of the family business in question. Some may find co-investment to be a more palatable approach, allowing them to maintain a greater degree of control over their operations. Others may see external capital infusion as a means to accelerate growth and access new markets.

The Role of Family Offices

Integral to navigating these choices is the role of the family office – a trusted advisor tasked with safeguarding the financial interests of affluent families. Whether pursuing co-investment or external capital infusion, family offices play a crucial role in guiding decision-making and ensuring alignment with long-term goals.

As Italy’s family businesses chart a course toward the future, the convergence of private equity and family offices offers a wealth of opportunities for growth and revitalization. By embracing both co-investment and external capital infusion, these enterprises can leverage the strengths of private equity partnerships while preserving their unique identities and legacies.

Conclusion: Two Paths, One Destination

In conclusion, the dual paths of co-investment and external capital infusion represent two sides of the same coin for Italy’s family businesses. By carefully weighing the options and leveraging the expertise of family offices, these enterprises can navigate the complexities of modern business and chart a course towards sustainable success in an ever-changing world.

Why should I be interested in this post?

This post presents a valuable opportunity to better understand the unique characteristics of the Italian market, predominantly driven by family businesses, and to explore its evolving landscape as it embraces a new business paradigm: Private Equity. Studying this transition offers insights not only for academic enrichment but also for future career prospects in Private Equity. Understanding how Italy’s traditional family business-dominated market is adapting to and integrating Private Equity opens doors for both educational exploration and potential professional paths in this sector.

Useful resources

Bocconi Student Private Equity Club (2024) Overview: The Private Equity Market in Italy over the last 20 years

Deutsche Bateiligungus AG (2023) Private equity in Italy – an undervalued market

FamilyCapital (2020) The big private equity groups backed by families

AltiGlobal (2023) Italy’s next generation of wealth holders step up to grow family wealth while they wait for senior leadership roles

About the author

The article was written in May 2024 by Dante MARRAMIERO (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2022-2024)