Q&A: Distressed investment in Italy

While in the last few years many European countries have progressed turnaround investing from a discreet understudy to a full-fledged private equity sector, in Italy the number and volume of turnaround investments has stayed relatively low, says Dante Leone of Milan-based law firm Capolino-Perlingieri & Leone. 

Dante Leone

In Italy, only two turnaround investment deals with a combined worth of €20 million took place in 2010. Compared to the UK, an economy of similar might to Italy, 24 turnaround deals were signed worth an approximate total of €300 million—according to Swiss-based industry specialist Clearsight Investments, which tracks turnaround teams across Europe. A look into the years preceding 2010 shows a similar trend, proving 2010 wasn’t a blip in terms of outperformance.

Or take for example the Netherlands, a country with roughly 25 percent of Italy’s population but hosting at least four times as many active turnaround investment teams, according to Clearsight Investments. In 2010 alone the country had five times the volume of Italian turnaround deals.

PEM visited Leone in his firm’s Milan office to discuss what’s holding Italy back.

What accounts for Italy’s relatively poor performance in distressed investment?

One major factor is that Italian companies under stress often delay entering bankruptcy proceedings because Italy’s legal system has a number of public programmes to keep distressed businesses afloat. The problem is exacerbated by Italy’s regulatory system, which makes acquiring assets from a bankruptcy proceeding require an inordinate amount of work and patience—and further prone to judicial challenge by competitors.

Does Italy’s legal and regulatory setup impact the country’s healthier performing companies?

It certainly does. Many of these “zombie” companies do not disappear—and stick around for a number of years. This hinders better managed companies from growing as much as they would otherwise. This less dynamic pace in the face of ever-evolving global economic cycles is certainly a reason why Italy has not yet succeeded in attracting the kind of turnaround investors that operate in similar Western European economies, such as France or the UK.

What are these economies doing differently from Italy?

They are providing a better environment for the industry. It’s a combination of friendlier regulations, more efficient incentives to provide fresh starts to ailing companies and banks taking a more entrepreneurial approach to their businesses.

What do you mean by banks taking a “more entrepreneurial approach”?

In some Western European countries, banks often contact turnaround investors in order to find possible solutions for troubled businesses that they are involved with and are not shy about trying to redress a situation of distress. Banks in those economies act as drivers of revitalization, as opposed to drags on growth.

Why specifically are Italian banks more reluctant to engage with turnaround investors and (in general) to write down a company?

It is difficult to pinpoint a specific reason. There certainly are a few factors that combine to create the current situation. For example, members of the management and credit teams at Italian banks do not change companies as much as they would in other countries. So, it is very likely that, even after many years, the person or the team that authorized the loan is still at the same bank. This may make it very difficult for the same person or team to admit that it was a bad decision, and concede defeat internally.

Where do you expect turnaround investing in Italy to go from here?

Caretakers of bankrupt companies and supervising courts are starting to display a slightly more entrepreneurial approach, possibly signaling greater favour for turnaround investors. In the short term, I would expect a few teams to develop into proper institutional players, and the market to develop a better understanding of the role that turnaround investing can play in the economy.