In contrast to other European markets, Italy reported an increase in private equity investment activity in 2002. “Though last year can be considered something of a transition year, following the disappointment of 2001, we expect overall investment figures for 2002 to return to the highs of 2000. Investment activity in the first half of 2002 alone matched that for the whole of 2001. So we are quietly optimistic,” says Roberto Del Giudice, head of research at AIFI, the Italian private equity and venture capital association in Milan.
Moreover, Del Giudice is confident the market will grow even more during 2003. “We are not yet in the maturity phase and as such the growth potential here is very high. I strongly believe we will see further growth both in terms of number of players and amounts invested.”
He adds the market is moving towards one based on later stage deals and mid-market buy-outs. “What is interesting to note here is that these sectors are drawing increasing numbers of players who previously only really preferred big deals. Furthermore, this is an area that hasn’t been affected so badly by declines in the stock markets, whereas the venture capital segment and early stage markets are suffering.”
The institutional market continues to be dominated by overseas players, says Del Giudice, since the new recently-launched domestic pension funds are reluctant to include private equity in their allocation strategies. “This is a shame as the opportunities are there. We would really like to see Italian pension funds become a major player in private equity. From a legal point of view, the doors are open, as they are not particularly restricted in the amount they can allocate to the asset class. We hope as their asset base increases, so they will become less cautious about alternative investments.”
2003, he says, will carry on where 2002 left off, with renewed energy going into the Italian private equity sector. “Recent divestitures of non-core business here, both among big Italian and overseas corporations, is accelerating deal flow activity and this sets us up for another good year.”
The Spanish private equity and venture capital markets saw the volume of investments decline by 28% in 2002, as the slump in the equity markets and the uncertainty over a war in Iraq took their toll, according to Sebastien Chartier, managing director of Madrid based financial consultancy and research specialists, Capital & Corporate: “These figures may appear startling but they are not as worrying as they might seem. In fact, we see the declines, from €1,325m in 2001 to €954 in 2002, as a temporary setback in a market that is continuing to grow and expand.”
Capital & Corporate’s figures, the results of a survey they undertook of 95 companies active in Spain’s private equity industry, confirm a trend common to other markets across Europe - that the decline refers mainly to new investments- but belie on overall sense of optimism. “Spain’s private equity markets continues to attract investors and the creation of new funds. We expect to see the value of investments to top the €1,500m mark during 2003. This level of growth places Spain’s private equity industry in a very favourable position compared to most other developed markets,” says Chartier.
David Bendel, a founding partner of Excel Partners in Madrid, believes the most important new development in Spain is the changing way investors view private equity. “Investor interest in Spain is continuing to grow, with more and more people entering the market, despite stock market declines and a drop in overall investment volumes. But the real big thing here is investors beginning to consider private equity as a fully fledged asset class rather than a speculative financial instrument,” he says.
Bendel claims this evolution has been accelerated by the government’s decision to sell assets to private equity firms. “This gives the industry a sense of legitimacy and coupled with the exponential growth of intermediaries, sets the Spanish market up for further expansion when other markets are cooling off.”
Bendell says there were no notable fund raisings in 2002, as investors have become more cautious, but there was growth in the number of mezzanine companies being established and many companies are restructuring at financial level. However, he believes Spain still lags some way behind established markets like the UK and US. “The Spanish private equity market is healthy but it is still young and unsophisticated. Thus its development needs to put into context. Most international groups getting into Spain are chasing the same deals. Exit is still difficult and whilst Spain appears cheap to overseas investors, we have to remember that for every buyer there is a seller. In international terms, it’s still pretty much a village here and it’s a market characterised by sheep and goats.”
Bendel says there is still a lack of investment in private equity by institutionals such as pension funds but the reasons for this are unclear. “Spanish pension funds are conservative and reluctant to investigate new opportunities, but their reservations about private equity may simply be tax-driven. Most institutional investment here continues to come from overseas players.”
In France, the early stage market has seen a sharp decrease in opportunities whilst the LBO area is shaping up pretty well in light of problems caused by stock markets declines, according to Charles Soulignac, chairman and managing director of Fondinvest in Paris. “The French market is down as elsewhere but there is no real sense of panic. The main problems concern new money, especially early stage investments, but overall, with good development of the LBO sector, there is still a lot of appetite for private equity in France,” he says.
Soulignac doesn’t believe the problems will be long-term and successful private equity management firms, especially those active in the funds-of-funds area, will have the capability to restructure accordingly to avoid making losses. “The current problems are a question of liquidity, both for investors and companies. Whilst there were no notable fund raisings to speak of last year, successful management teams have the capacity to adapt to ensure they remain profitable. This is particularly true of the funds-of-funds business, where more and more investors, interested though cautious of private equity, are choosing to invest via funds-of-funds since these offer greater protection for their assets,” he says.
Soulignac says how private equity in France develops in 2003 depends largely on the wider macro-economic situation. “The market is prepared for further losses in the early stage. The LBO market is likely to see further growth. Whilst investors remain reserved and are certainly more cautious.”
Dominique Peninon, managing director of Paris-based Access Capital Partners, believes the competition for large buyouts among an increasing number of interested parties is adding value to the French private equity market, but there is a danger prices could reach very high levels. “While prices in the mid-market are more realistic, there is a danger that the increased number of private equity buyers at the top end – fuelled by interest from new French spin-offs and foreign entrants – is pushing prices to optimistic levels. However, this is being counter-balanced by the number of larger corporate sellers who are under increasing pressure from their own banks to improve their balance sheets.”
Furthermore, Peninon, says there are good prospects for international institutional investors to get involved in the French buy-out funds markets whilst a lack of an IPO market and reduction in trade buyers is adding value to deal flows.

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