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Small Italy firms offer opportunities to private equity

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Some mid-market equity firms opening offices in Milan

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Credit funds moving in to finance private equity buyouts

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Direct lending market growth faces constraints - Deloitte

By Valentina Za

MILAN, Aug 5 (Reuters) - Global private credit firms,

including industry leader Ares Management ( ARES ), are increasingly

focused on Italy as more small businesses which are the backbone

of its economy open up to outside investors, providing buyout

deal opportunities.

With 140 direct lending deals completed over the past 45

quarters, Italy accounts for just 4.3% of continental Europe's

overall transactions, Deloitte Analysis said.

But increasing competition in the sector across Europe,

where traditional banks are reclaiming a slice of the syndicated

loan market and pressuring returns, heightens the appeal of new

growth areas, Deloitte data showed.

"Italy is the new frontier for direct lenders due to its

growing relevance for private equity firms active in the

mid-market," Tyrone Cooney, a partner at Ares Management Credit

Group in charge of France and southern Europe, told Reuters.

Ares, which manages $428 billion in assets globally, has

completed three Italian deals with an investment size of between

50 million and 150 million euros ($55-$165 million) in recent

months.

"While competition in the Italian market is increasing,

Italy is not as competitive as the UK, France and Benelux."

The $1.7 trillion private credit sector is more developed in

the United States than in Europe, where the International

Monetary Fund however recorded 17% annual growth over the past

five years.

Direct lenders traditionally focus on middle-market firms,

which are too small to sell public debt and require financing

that is too large for a single bank.

Italy's industrial north is home to hundreds of family-owned

companies that compete globally despite their small size, which

in recent years have increasingly been opening up to private

equity firms as owners age.

Industry association AIFI recorded 224 private equity

investments in Italian family-owned firms in 2022, versus 151

four years earlier.

"We've been working with several new entrants into the

Italian market," Cooney said, adding newcomers were mid-market

private equity funds Ares had previously teamed up with in the

Netherlands, France, Britain and Scandinavia.

MILAN OFFICES

Some pan-European investment firms looking to expand into

Italy set up local offices.

France's Montefiore Investment opened a Milan office in

September 2022, followed by the acquisition of a majority stake

in luxury retail general contractor EXA in 2023, its first

Italian deal.

A&M Capital Europe, a London-based middle-market private

equity fund, plans to open a Milan office early next year.

Francesco Di Trapani, a senior adviser at private credit

manager Pemberton who focuses on Italy and Spain as head of

southern Europe, said the growing private equity interest meant

more business for direct lenders in Italy.

Advisory firm Deloitte expects the proportion of Italian

private equity deals financed by credit funds to rise to 15.8%

of the total in the second half, up from 10.5% in the first and

8.6% last year.

London-based Pemberton arranged three deals in Italy this

year, including fund Ambienta's buyout of engineering group

Officine Maccaferri, where banks JPMorgan ( JPM ), Intesa Sanpaolo and

UniCredit which provided shorter-dated financing, covered 40% of

the total financing.

Italy typically offers between five and 10 deals above the

100 million euro threshold targeted by Pemberton, and Di Trapani

said that, given the number of competitors in that size range,

each fund got two or three deals a year.

"The expectation is that the total could rise to 15-20 per

year, attracting new entrants," he said, adding Italy's stable

political situation helped.

However, Italy's credit market faces hurdles due to lack of

investors for domestic players which could be active alongside

heavyweights such as Ares, Claudio Scardovi, a Deloitte partner

in Milan said.

Large industry players, capable of attracting international

investors, typically target deals with financing of at least 50

million euros. Italy's average deal size is of just a few

million euros, and would suit small domestic direct lenders.

"They proliferate, but often struggle in their fundraising

because of their single-country focus and below-scale size,"

Scardovi said.

($1 = 0.9102 euros)