The Italian capital market: new trends and opportunities

Transcription

1 The Italian capital market: new trends and opportunities Lugano Fund Forum 20 th November 2017 by

2 MOMentum Alternative Investments SA Independent Asset Manager, authorized and supervised by the Swiss Financial Market Authority FINMA (pursuant to the Federal Law on collective investments, LiCol), whose capital is entirely held by management. Michele Milla: MOMentum s «historical» partner. Manager of 2 investment funds of GAM Private Labelling s Multilabel SICAV: Artemide(2010): «market-neutral», total-return Fund with annualized daily volatility < 3%. Lyra (2014): Fund specializing in small&midcaps, with a long-bias approach and specific focus on Italy. 2

3 : a crisis decade Italy: some data GDP: Italy at -7% with a 13% gap vs. «core» Europe over the period analysed. 6,0% 4,0% 2,0% 0,0% -2,0% -4,0% -6,0% -8,0% GDP (Euro) e Italy Germany Euro Area Unemployment as of 30 th October 2017 at 11.2% (35.1% youth unemployment) vs. 6.2% as of 31 st December 2006: a level now viewed as «structural» with foreseeable repercussions on inflation forecasts Unemployment Rate Italy Germany

4 : a crisis decade Italy: some data real estate market: prices down 15% and volumes down 35%. Recovery as from 2014, unevenly spread at geographic level (interest focused almost only on Milan). Real estate: n of residential transactions( 000) Trade Register: 1,019,000 closures vs. 830,000 new openings. The two figures were almost equal until

5 : a crisis decade Consequences for the domestic banking system: 1) Sharp deterioration of credit quality for the whole sector ( 209.8bn NPLs at end-2016 vs. 77.8bn at end-2010), often with inadequate provisioning policies. The coverage in H17 increased from 52.8% to 62.3%. 2) Inadequate balance sheet Regulator s action with the goal to «secure» the Sector. 3) Regulatory discontinuity lack of certainties for all players involved (enterprises, banks and financial markets). 4) Management and governance reshuffle new guidelines looking at the future. 5) «Top line» penalized by the contraction of both volumes and unitary margins, with commissions still not representing a significant share of revenues before the crisis. Strong contraction of the capacity to grant credit to non-best-inclass companies, hence with a sizeable counterparty risk Italian Gross NPL Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 GROSS NPL COVERAGE 75,0% 65,0% 55,0% 45,0% 5

6 : a crisis decade Consequences for the industrial sector: 1) Approximately 10,000 small&mid caps (sales between 30m and 300m) in Italy, structurally undercapitalized versus other European countries, therefore more exposed to the banking sector (Equity/debt 84% vs. 124% in Germany). In Italy, micro-businesses (less than 10 employees) account for 95% of the total vs. 84% in Germany. 2) High financial tension as a result of the deep crisis. 3) Impossibility to access bank financing. 4) Dull capital markets (both equity and debt), unable to meet these urgent needs. Companies were forced to focus on short-term management and could not seize strategic medium/long-term opportunities (M&A, entry into new markets, investments in new machinery/manufacturing processes) loss of competitiveness. Italy consequently turned into a land of conquest (i.e. Bulgari, STS, Pirelli, Telecom Italia, Mediaset). 6

7 Light at the end of the tunnel In a deeply changed scenario compared to the recent past, opportunities inevitably emerged that the banking system was unable to seize because still busy with its in-depth restructuring. This favoured the birth of new, specialized players, capable of meeting the system s urgent needs. Also the Italian Government realized these deficiencies and took promptly action with the goal to support Italy s manufacturing system. The banking system was actually disintermediated in conjunction with a deep re-examination of the bank «model». We wish that enterprises resorted more often to markets and less to intermediaries and -among these -that they turned less to banks. Paradoxically, banks smaller role could be a way to return to profit and to adequately remunerate a growing capital. This vicious circle could help economic growth and increase the stability of the banking system. 0,80X 0,70X 0,60X 0,50X 0,40X 0,30X 0,20X MKT CAP/GDP Italy Germany Euro Area 7

8 Current situation What can «finance» do to turn the cyclical growth of domestic economy into real, long-lasting, structural development? Entities/instruments that filled the «gap» left by the banking system: Private Equity Funds SPACs («Special Purpose Acquisition Companies») PIR («Individual Saving Plans») Players specializing in debt instruments for small&mid caps («mini-bonds») AIM segment: strong revival of interest for a forgotten instrument These entities/instruments also benefited from the ultraexpansive monetary policy adopted by the ECB in recent years. This policy led to a sharp compression of the «free risk» and to the related increase of risk appetite among investors. 8

9 Private Equity Funds These players benefited from: 1) Very squeezed valuations of target companies, mostly as a result of the financial crisis and of the lack of alternatives for entrepreneurs (IPO market practically closed in the decade). The multiples of the secondary market (P/E single digit, EV/EBITDA <5x) also contributed to maintaining the valuations of the few deals completed at very low levels. 2) The abundant liquidity collected by these investment vehicles. Today investors are in fact willing to bear the «illiquidity risk» typical of these instruments in exchange for very interesting expected returns compared to the current interest rate level. This led many investors categories (mainly family offices) to «structurally» re-examine their asset allocation. 3) The easy recruitment of highly-skilled managers to be involved in planned transactions. An «industrial» approach often replaced an aggressive use of the leverage, making the sector s current business model less vulnerable. Between 2014 and 2017 Private Equity and Venture Capital invested 5 billion in risk capital. An amount close to pre-crisis levels. 9

10 SPACs («Special Purpose Acquisition Companies») Investment «vehicle» imported from the UK, it represents an alternative to the traditional IPO («Initial Public Offer»). From an investor s standpoint, a SPAC is characterized by undeniable strengths: 1) The «withdrawal right» (exercisable in the 15 days after the extraordinary shareholders meeting on the approval of the «business combination», in case of non-adherence) offers almost total protection to the initially invested capital. This value is in most cases at least equal (if adjusted by the free warrants) to the subscription price of the shares at the time of the listing. 2) The issuance of free warrants guarantees a «leverage effect» in case of successful deal. 3) Much quicker listing process with fewer uncertainties for entrepreneurs. 4) Less invasive transaction for the target company s governance. A SPAC usually acquires a minority stake (max 30%). There remains to ease the «conflict of interest» of the sponsors at the time of the business combination lug.15 ago.15 nov.15 mag.16 ott.16 ott.16 mar.17 lug.17 lug.17 ago.17 ago.17 set.17 Space 2 Capital Glenalta For Food Progress 1 Italian SPAC Industrial Space 31 Innova Stars of Italy 1 Italy 2 Crescita Glenalta Sprint Italy EPS Capital For Progress 2 Spactiv 10

11 PIR («Individual Savings Plans») Prompt action by the Italian Government, which, at end-2016, introduced a form of tax incentive for those who finance (equity and/or debt instruments) domestic small&mid caps. Characteristics: 1) Cap to the tax-exempt investment: 30,000 a year for 5 years (hence, 150,000 over the five years). Proposal to lift the threshold up to at least 50,000. 2) The investment must be kept for a minimum of 5 years, otherwise the tax exemption would be lost. 3) The investment can be made directly in the targets companies or, alternatively, by investing in «PIR-compliant» Funds. 4) Exemption of this portion of personal wealth from inheritance taxation. This instrument has therefore channelled new capital (> 8bn YTD) towards domestic small&midcaps and significantly contributed to the rerating of this asset class. Currently, there even exists the risk of a valuation bubble (P/E > 30x). It should however be noted that this is a stable and long-lasting (minimum five years) financing source, therefore capable to respond to the target companies needs. PIR: inflow YTD ( bn) 11

12 Mini-bonds Some Micro caps, after having been denied access to banks, needed to open alternative channels to access debt instruments. During the crisis, not only did the relative weight of debt and risk capital change, but also the mix of enterprises sources of debt, which saw bonds growing to the detriment of bank credit. Potential investors willing to finance Micro caps however need to diversify the «issuer s risk» and the exposure to single sectors/countries. The liquidity of this instrument on the secondary market represents a criticality. Where this exists, the secondary market is often inefficient, forcing investors to accompany the target until the reimbursement date of the instrument (typically 3-5 years). Often generous yields (>5%). From 2012 to date there have been 140 new issuingsfor a value in excess of 10 billion. Specialized Funds as a meeting point between issuers and investors needs. 12

13 AIM From ugly duckling. «Light» regulation in order to avoid an overly expensive and time-consuming listing process. Very illiquid and consequently inefficient market segment, considered as «uninvestable» by most of large institutional investors. Issuers often scarcely transparent as regards market communication, with several «bumps in the road» (Italia Independent Group SPA, H-Farm SPA, InnovatecSPA, Net Insurance SPA) contributing to reducing the appeal. Highly disappointing aggregate performance, which discourages new target companies from evaluating this segment. to (possible) swan Valuations at high discount (>30%) compared to the rest of the official lists (MTA and «Star» segment) and the strong flow of new liquidity helped bring AIM back into the spotlight. M&A and interest by Private Equity funds (TBS) reinforced this interest. An upgrade of the regulation is desirable, with the goal to also attract the interest of large foreign investors. 13

14 A glimpse to the future The current scenario justifies (moderate) optimism: 2017 and 2018 GDP expected at +1.5% and +1.6% respectively. This data should be analysed considering that public spending accounts for approximately 50% of this amount. The «private» component is therefore growing at least in line with the most virtuous countries. The domestic industrial system is strongly represented by small&mid caps, in some cases a real «excellence» in their respective market niches (GIMA TT, Technogym, Interpump, Brembo, Amplifon ). PE Funds, SPACs, Mini-Bonds and PIR are reliable and long-lasting sources of financing, which can therefore be adapted to the needs/expectations of entrepreneurs. An acceleration of profitability of domestic small&mid caps as a consequence of this new «structural» context is likely. Also, the reliance on banks has fallen largely, thus removing a possible future source of risk. 14

15 A glimpse to the future The system is however still too much based on financial debt and too little on risk capital, with banks still playing an excessive role. This role however backfires on them, as it makes them more vulnerable during recession phases. It is reasonable to expect a rich pipeline of companies going public, in answer to the large demand created by these new players. These changes are «structural» and therefore capable of making this new scenario sustainable. They also justify large investments by the main players (chiefly Asset Managers and banks). Birth of «niche products», capable of seizing the opportunities that will emerge each time. Therefore also with an opportunistic approach. 15

16 CONTACTS MOMentum Alternative Investments SA RSM: Michele Milla Phone: Fax:

17 DISCLAIMER This document is issued only for and/or directed only at persons who can be considered professional clients or eligible counterparties. Accordingly, the opportunity to invest in the Fund or to participate in any other investments to which this document relates is only available to professional clients or eligible counterparties and this document must not be relied or acted upon by any other persons. The information or opinions contained herein are for background purposes only and do not purport to be full and complete. No reliance may be placed for any purpose on the information contained herein or on their accuracy or completeness. No representation, warranty or undertaking, either explicit or implied, is given as to the accuracy or completeness of the information or opinions contained herein by the Investment Manager and no liability is acknowledged or accepted by the Investment Manager for the accuracy or completeness of any such information or opinions. 17