Sunday, February 13, 2011

The Italian Venture Capital Market: Past Evolution and Recent Developments

As the Italian venture capital has changed over the last decades and information on its evolution is rather fragmented in this post I try to put together the relevant information starting since the beginning of the Italian venture capital market till its more recent developments.

The Italian venture capital market has overcome different waves of growth and specialization trends in the past 25 years. The market has notably been affected by the economic cycles and by some major facts that have influenced the whole economy as well. The evolution of the Italian venture capital market can be focused in specific periods. In particular, from 1900 till 1986 (almost a century) venture capital has been present in the country, only in a form that we might call "Informal VC". Important entrepreneurs contributed, by way of private investments, to the foundation of new companies. In the 70s though the capital needed to finance the growth of new and consolidated businesses was primarily coming from the bank system; both the capital market and the Venture Capital were not broadly used by Italian entrepreneurs. 1986 represented an historical change of pattern. Indeed, A.I.F.I. (the Italian Venture Capital and Private Equity Association) was formed and 15 operators took off, starting to implement some pure venture capital investments. This first wave of Institutional venture capital players,decided to enter the Italian market also due to the great success that VC was having in the United States. 

Italy, at that time, did not present the most favorable conditions for that kind of deals. As a consequence, those players had to go through a difficult period in which not all the investments had the expected success. In 1990 some more 30 operators moved their focus on the later stage investments, a much more fertile ground in Italy, where companies were more numerous and available. From 1990 till 1996 the Italian market focused on private equity investments with a particular concentration on medium companies in need of development capital. The constant growth of this market really brought Italy into the European top 6 countries for later stage investments.
In 1998 the market was influenced by two very important facts:
  • the deregulation in the Telecom industry;
  • the Internet.
Both this events had the force to move part of the later stage players back into genuine venture capital investments and to establish the growth of brand new players. In 2005, the Italian venture capital industry accounted for 281 deals for a total investment of €3 billion. Venture capital funds were becoming real players in the activity of ownership reallocation of Italian companies, as well as in the process of development and internationalization and the support for generational change. Specifically medium sized buys outs boomed in 2006: the industry was dominated by buy out deals between €50 million and €150 million. In general, the growth registered by the Italian VC industry is consistent with the European trend that was a strong development in the investment activity that reached levels never registered before, according to the results issued by the European Private Equity and Venture Capital Association (EVCA). The number of players in the industry registered a sensible growth. In 2005 and early 2006, there has been a sensible increase in the number of players in Italy: AIFI, the national organization gathering Italian VC and PE firms, counted 106 associates, up to 82 at the end of 2004. The growing trends continued bringing the Italian market in line with the international markets. In 2005, many new players were involved in raising new funds and, although the amount raised was inferior to that of the preceding years, the fund raising activity was particularly interesting thanks to a high number of new initiatives. 

The effects of the financial crisis have also reached the Italian private equity and venture capital market which, after hitting record levels in 2008, in the first half of 2009 saw a decrease in activity. Indeed, between January and June 2009, the market recorded 155 new deals, for a total value of €1,069 millions (-61% on first semester 2008 figures). The decrease in the number of deals, on the other hand, was limited to 9%. As usual, the greatest part of the total amount invested flowed into buy out deals that represented 74% of the total with €785 millions invested. It must be underlined that this figure is equal to a 36% decrease on first semester 2008 figures, while the number of buyouts, that reached 43 from 49, registered a 12% increase. Therefore, the most dramatic decrease was registered in the deals' size, as proved by the lack of so-called mega deals (over €300 million) in the first half of the year.

As in the past, expansion deals attracted the greatest number of investments, with 58 deals for a total value of 132€ million invested (+2% on first semester 2008 figures). On the other side, this growth trend in the early stage segment continued, with a 7% increase in terms of invested volumes, equal to €56 million. With 46 deals (+15%), the early stage segment came second in terms of number of investments. Positive results came also from the turnaround segment: in the first 6 months of 2009, the total amount invested in this kind of deals reached €78 million from €22 million recorded in the first half of 2008. In general, it is worth underlining that the average size of the amount invested in each single deal underwent a drastic reduction, down to €7 million in the first half of 2009 from the €16 million recorded in the first half of 2008. Finally, as regards investments in Italy-based companies, the Northern regions attracted 66% of total investments, while 30% flowed into the Central areas and only 4% into the South (AIFI, 2009). The crisis had an especially strong impact on the divestment activity: on one side, it made way out difficult; on the other, it influenced the evaluation of the companies held in portfolio. Over a total of €1,069 million divested in the first part of the year, a large percentage was represented by the depreciations that took place in the semester, equal to 93% of the total amount divested. In terms of number of divestures, down to 67 (-27%) in the first half of 2009 from 92 in the first 6 months of 2008, more than a half (54%) were represented by write offs. Among the other types of way out, trade sale was the commons representing 34% of total number of divestments. Finally, the difficulties of the current economic context affected the possibility of raising new funds: institutional investors in Italy attracted financial resources for a total of about €290 million, 68% less compared with the same period of 2008. In terms of geographic origin of the funds raised, the domestic component represented 94% of total independent fundraising (82% in the first half of 2008). These resources were mainly aimed at financing investments in infrastructures (42%) and expansion deals (34%).

Also in the the first half of 2010 Italian private equity and venture capital market, continued to significantly suffer due to the financial crisis, recording the lowest levels in years. Between January and June 2010, 129 new transactions were registered, for a total value of €552 million, representing a decrease of 48% over the same period of 2009, when the first effects of the financial crisis had already begun to manifest. As opposed to this, the decrease in the number of transactions was more limited and equal to 17%. 

Despite a difficult context, positive signals came from the expansion segment, concerning minority investments aimed at supporting development programs of existing companies, which in the first half of 2010 was characterized by a growth of 10% of the invested amount, passing from €132 to €145 million, spread over 50 deals.

Again with reference to the type of investments made, it should be also noted the substantial steadiness, in the first half of 2010, of the early stage segment (seed and start-up investments) which, with 51 deals and the investments for about €41 million, was positioned at the top for number of investments, registering a growth of 11% over the same period in 2009. With regard to divestments, in the first half of 2010 were divested investments for an amount, calculated at historical cost, equal to €470 million, spread over 62 divestments.

Importantly, although the depreciation of portfolio companies represent more than half of the divested amount (€268 million), this figure is almost exclusively due to some very large single write off. In terms of numbers of write-downs, in fact, there was a decrease from 36 to 9. Positive signals also came from the distribution of exits by type, that has prevailed since the assignment to industrial partners (30 disinvestments, compared with 23 of the first half of 2009). Trade sales, were also characterized by a significant increase in terms of amount, from €41 to €91 million (+138%).

With regard to the raising of new capital, from data for the first half of 2010 emerges an improvement compared to that observed in the same period of the year before: resources flow towards institutional investors active in Italy. Indeed, they amounted to about €473 million, 63% more than in the first half of 2009.

As of 30 June 2010 active investments (i.e. not yet divested) in the overall portfolio at cost of operators present in Italy, amounted to about 1,300 spread over 1,100 companies for a total of holdings - valued at purchase price - of approximately €19 billion. On the same date, the available resources for investment stood at around €6.8 billion.

  1. AIFI (2001): Un questionario per gli attori del Private Equity e Venture Capital Italiano.
  2. AIFI (2001): Yearbooks 2000. AIFI.
  3. AIFI (2006): Il mercato italiano del Private Equity e del Venture Capital, annual reports, 1997-2006.
  4. AIFI (2009): The Italian Private Equity and Venture Capital market in 2009. AIFI statistics.
  5. AIFI (2010): The Italian Private Equity and Venture Capital market in the first semester 2010. AIFI statistics.