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Private equity overview Italy 2000

In 2000, private equity firms in Italy raised E2.92bn in total. This represents a significant increase of 67 per cent on the 1999 figure. The rapid expansion of the Italian private equity market has continued over the last year, as recent regulatory reforms have taken hold. Here EVCA provides a full overview.

The Italian private equity industry has experienced yet another year of rapid expansion. This growth was reflected in an increase in the number of AIFI full members from 61 in 1999 to 73 by the end of 2000.

From a legal and fiscal point of view, the sector is undergoing a period of consolidation and reorganisation after several new regulatory reforms introduced over recent years have encouraged a wide range of organisations to operate in the market. At present, the private equity market consists of Italian banks and their subsidiaries, investment companies, Italian closed-end funds, international banks, advisors to private equity funds, public or private players with regional focus and investment companies linked to the cooperative system.

In terms of investor specialisation, several players have focused their activity on the high-tech start-up segment over the past few months. However, most of the market is still composed of private equity investors and generalists.

Sources of capital

The total amount raised in 2000 was E2.92bn (Lira 5,663bn), which marks an increase of 67 per cent on the previous year's amount of E1.75bn (Lira 3,397bn). As in the past, the bulk of the funding was obtained from banks, which made up 42.9 per cent of total funds raised, followed by corporate investors (26.4 per cent) and international fund of funds (10.7 per cent). The proportion of funding from the domestic market remained steady at 47 per cent, with other European countries accounting for approximately 40 per cent, up from 35 per cent in 1999 and the non-European countries for 13 per cent, down from 18 per cent in 1999.

Investment patterns

The rate of growth in the Italian private equity market edged down in 2000 relative to 1999. Nevertheless, 2000 can still be considered as an exceptional year. E2.97bn (Lira 5,748bn) was invested in 490 enterprises, representing a growth of 67 per cent in terms of amount invested.
The total number of investments amounted to 646, an increase of 66 per cent on the previous year.

When looking at investments undertaken in 2000 by stage, buy-outs were the most important category in terms of amount invested (45.9 per cent), followed by expansion (32.6 per cent), start-up (13.7 per cent), seed (4.4 per cent) and replacement (3.3 per cent). If we consider the number of investments, it is evident that the number of seed/start-up deals has increased from 153 in 1999 to 339 in 2000 corresponding to 244 companies. These two categories made up the majority of deals and the percentage of seed/start-up deals exceeded 50 per cent. As for geographical distribution, 85.1 per cent of investments (by number) were made in Italy.

With regard to the sectoral distribution of investments, it is worth highlighting the remarkable growth of investments in high-tech firms. The amount invested increased from E0.32bn to E0.67bn (Lira 1,302bn) in 2000. The percentage of investment in high-tech companies relative to the total amount invested rose from 18 per cent to 23 per cent. More striking are the figures on the number of high-tech deals. These increased by 176 per cent, from 118 in 1999 to 326 in 2000, and accounted for more than 50 per cent of the overall number of deals in 2000.

Legal and fiscal environment

Since 1997, the Italian government has been undertaking substantial reforms to corporate income tax and investment vehicle rules. Outlined below are the main regulations resulting from the tax and legal reform.

In 1998, the Italian government approved a new finance act (Legislative Decree 28 February 1998, n. 58, better known as the Draghi Act) concerning the whole financial sector including, among others, financial brokerage activity, open-end and closed-end investment funds, SICAVs, and specific rules applying to quoted companies. The act has also introduced, for the first time in Italy, a complete set of corporate governance provisions. In accordance with the new regulations, the treasury, the Bank of Italy and Consob issued the implementing provisions during 1999.

Regulation concerning investment policy, rules for closed-end funds exclusively dedicated to qualified investors and the criteria against which the average value of the fund's shares shall be determined, were issued by the treasury and the Bank of Italy during the second half of 1999. The new regulation provides specific rules for closed-end funds dedicated to qualified investors via a private placement as opposed to retail funds via a public offering.

Funds dedicated to qualified investors are not subject to general asset management limitations upon agreement of the Bank of Italy. This kind of fund is also allowed to draw down the committed capital in accordance with the investment requirement of the fund.

Taxation

Closed-end funds are subject to a substitute tax rate of 12.5 per cent on the performance of the fund including realised and unrealised investments. Losses due to negative performance of the fund can be carried forward in subsequent years. Individual resident investors are fully exempt from taxation on proceeds received from the fund. Corporate entities resident in Italy are fully taxable on net proceeds received from the fund, but a 15 per cent tax credit is granted. All non-resident investors are fully exempt from Italian taxation and in order to recover the substitute tax paid by the fund they are entitled to receive from the state (via the management company) a 15 per cent reimbursement in cash, calculated on net proceeds received from the fund. Funds subscribed exclusively by foreign investors are totally exempt from ordinary income taxes and from the substitute tax.

The Italian authorities have recently introduced several tax benefits that make Italy much more attractive for investments.

The ordinary corporate income tax rate (IRPEG) will decrease from 37 per cent to 36 per cent - for fiscal years 2001 and 2002 - and to 35 per cent - for 2003 and beyond.

Beginning from the current fiscal year, the substitute tax rate applicable to capital gains derived from the alienation or contribution of a business and of qualified participations is equal, under certain conditions, to 19 per cent. That substitute tax is also applicable in the case of mergers and divisions, recognised for tax purposes.

In order to promote equity injections into Italian companies, amendments to the dual income tax system have been introduced, so that the ‘ordinary' income (i.e. income up to a limit equal to seven per cent of new capital injections and retained earnings) benefits without limitation from the reduced corporate income tax of 19 per cent.

Exiting

186 divestments were reported in 2000 for a corresponding amount at cost divested of EO.46bn (Lira 900bn). The amount divested decreased by 19.6 per cent compared with the previous year. The most common method of divestment was the Trade Sale, accounting for 56 per cent of the amount (up from 37 per cent in 1999) and involving 108 deals in 76 companies. The second most common method was divestment by public offering (both IPO and Sale of Quoted Equity) with 21 divestments representing 13 companies and 16.9 per cent of the total amount.

This extract is taken with kind permission from the EVCA Yearbook 2000

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