PE Tech Report


Like this article?

Sign up to our free newsletter

Italian middle market offers less toppy valuations, according to Mandarin Capital

The last couple of years have been a period of recovery for the EU. Since Q2 2016, GDP growth has been on an upward trajectory, having risen by 2.3 per cent year-on-year, according to Eurostat. That is even stronger than the US, which, by comparison, grew by 2.2 per cent.  

A rising tide lifts all boats and in that respect, Italy has seen rising valuations and multiples, but it is fair to say that the country is still slightly lagging behind its EU neighbours including Germany and France.

Not that this is a bad thing. Indeed, for private equity groups operating in Italy’s middle market, the ability to source attractive companies valued at a lower peg than equivalent sized companies in other parts of the EU, is a distinct competitive advantage.

One such GP is Mandarin Capital Partners, an Italian-Chinese investment group that invests in European middle-market enterprises. 

The topic of PE investing in Italy will be discussed in a panel sessions featuring Lorenzo Stanca (pictured), Managing Partner at Mandarin Capital Partners, at the forthcoming IPEM event in Cannes, 24 to 25 January. 

“There is one peculiarity of the Italian market that makes it interesting, which relates to the mid-market space,” says Stanca. “The number of primary deals to secondary deals is still quite high. There are a number of entrepreneurial companies that are willing to consider financial sponsors for the first time, which is quite significant. The fact that the market is buoyant and it has been a seller’s market makes many entrepreneurs consider that it is a good time to sell.”

Italy is home to a large number of industrial companies that fall within the mid-market category; those turning over between EUR50 million and EUR150 million per annum. This makes it a fertile environment for mid-market specialists such as Mandarin.

Stanca observes that current areas of interest include food manufacturers, companies making components for electric cars, and cites in particular companies that produce containers for the pharmaceutical and cosmetics sector. These containers have to conform to high quality standards. 

“There are a number of small but very profitable Italian companies active in this area. It is one where you can find interesting targets to develop build-out strategies (investing in two or three companies) before selling them on three to four years later,” comments Stanca.

In the last few years, the number of domestic PE players has dwindled and only partially been replaced by new entrants. At the same time, foreign PE groups remain active to a limited extent, with many preferring to look at larger deals than deal with the nuances of Italy’s middle market.

But as Stanca is quick to state, this is an area that offers really interesting investment opportunities at a time where elsewhere in Europe, multiples keep moving higher and higher. 

“Being able to pay more reasonable valuations is really key.

“As such, it is vital to have relationships because being a mid-market investor, deals from investment banks are less frequent. Non-competition situations are quite common as some Italian entrepreneurs have concerns over auctions. Often, we see opportunities where we get to invest in these non-competitive deals; I would estimate that they represent 95 per cent of the investments we make. 

“In order to be effective, in this regard, one needs to be able to maintain an active relationship network. It’s a matter of knowing the right local advisors, the right boutiques as these tend to be the best channels for sourcing and making deals,” comments Stanca.

2017 can best de described as a seller’s market for private equity investing, with GPs keen to cash in on the attractive multiples gained. Mandarin only did the final close of its second fund vintage, MCP II, on 29 December 2015, and as such 2017 was too soon to make any exits. 

That being said, the team is currently working on three exits in the portfolio which it expects to conclude by the end of Q1, 2018.   
“The perception is that the current sellers market will likely continue,” says Stanca.

In a rising market environment where valuations show no sign of abating, identifying the right target acquisitions that can offer continued, future earnings growth is a key test for any PE manager, no matter what market they are operating in. 

Still, Stanca explains that being on the ground in Italy allows the team to scour the middle market and still pay relatively low multiples, relative to other parts of Europe. Mandarin’s Milan-based advisory team is strongly focused on trying not to pay too much. 

For example, this year, the average earnings multiples it paid for four acquisitions made in 2017 was less than 6x. That is only possible by scouting the market carefully. 

“Another factor involves finding niche leaders which have a strong market position and strong management. We bring expertise in terms of how to internationalise the business. We help them to enter new markets such as those in the Far East, which are the most interesting for Italian mid-market companies at present. 

“We therefore select companies that have strong market positioning, that are focused on the quality of the production process and which have good management teams. Ultimately, we want to help them to grow and make future acquisitions. If we buy a company turning over EUR50 million and we manage to turn that into EUR150 million, or we turn EUR8 million EBITDA into EUR15 million EBITDA, then we are generating the right sort of multiples for our investors,” explains Stanca. 

In terms of global investor interest in Italy, there are signs it is increasing. There was a period up until 2014 when Italy was off the LP radar but since 2015 there has been a steady uptick in interest. 

“Global investors tend to put Italy in the same investment basket as Spain, which is not fully correct because Spain is a less industrial market. 

“Spain has attracted more capital in the last couple of years than Italy but 2017 was a good year for Italian GPs and I expect that to continue in 2018.

“Yet, it is still a market that is viewed with some suspicion by global investors because of some problems that Italian GPs had 15 years ago. This has left a bit of a scar and as such investors still view Italy with more caution than they do other EU markets,” suggests Stanca.

Mandarin Capital is, like every other PE group, actively supporting those LPs who wish to make co-investments in target acquisitions. Given that the companies it looks at are relatively small, the size of co-investment tickets tends to be quite small also; approximately EUR5 million. 

“We see strong co-investor interest and we will continue to offer this to LPs. You have to in today’s marketplace. It helps us involve investors more deeply in investments and it gives them more of an understanding of what the investment issues are and how we deploy the investment strategy,” concludes Stanca.

Like this article? Sign up to our free newsletter