For years American investors—companies and individuals—have perceived Italy as a complicated place to do business. A legal system which makes the rule of law uncertain and untimely, employer-unfriendly labor laws, and a stiflingly bureaucratic public administration comprise three reasons why aggregate private investment in Italy from the U.S. since the end of World War II has been the lowest of any country in Western Europe with the exception of Portugal. Trends in recent years have not represented much of an improvement.
by Ronald P. Spogli, Co-Chairman of Freeman & Spogli &Co., former Us Ambassador to the Republic of Italy
When I served as Ambassador to Italy from 2005-2009 in the second administration of President George W. Bush, the U.S. Embassy developed a program to approach this lack of investment in a novel way. Based upon an in-depth understanding of the structure of Italian industries, we focused our efforts primarily on venture capital and private equity as practices to spur investment, bypassing or at least minimizing many of the structural impediments listed above. Regarding venture capital, Italy has no dearth of intelligent and creative minds, and many universities have STEM capabilities which are the envy of their counterparts stateside. Sadly and all too frequently, Italian universities have been slow to connect their innovative capabilities to investors. This historical reluctance to involve the Italian “Ivory Tower” in commercial activities coupled with an aversion to risk-taking have resulted in relatively low levels of indigenous venture activity. Through the Embassy program dubbed Partnership for Growth (P for G), we linked Italian innovators with the U.S. venture community in a variety of ways. Results to date have been modest but encouraging, and the pace of new venture formation is quickening with greater investment levels coming from U.S. based firms.
By contrast, the private equity industry has been very active in Italy for well over a decade. The country abounds in successful small and medium-sized enterprises (SMEs). The market capitalization of domestic stock exchanges relative to GNP is low in Italy versus other G-7 countries, and, historically, successful businesses have generally remained private, closely-held, and been passed down to future family generations. In recent decades, a side effect of lower birth rates in the Bel Paese and a waning interest of younger family members to remain involved in the family business, has been a smaller pool available to inherit and run such businesses. Private equity has stepped in and become a popular way for owners to solve intra-generational ownership issues and provide liquidity for selling shareholders.
My own experience as an investor in private equity in Italy has been positive. Indeed, the country is blessed with thousands of businesses which produce products and services which the world wants to buy. Frequently, the opportunity lies in assisting companies to penetrate new markets—often the United States—where their presence has either been nascent or non-existent. Sometimes, the ability to assist in the development of a coherent expansion strategy coupled with the capital to grow can be transformational events for many of these businesses. U.S. based private equity funds have become increasingly focused on Italy, as they search the globe for opportunities. Preliminary data suggest that 2018 was an extremely active year for American private equity funds in Italy. As the practice continues to gain acceptance in the country, it is reasonable to expect that transactional volume will continue to increase.