Creative, agile and family-owned: SMEs made in Italy

Gian Maria Gros-Pietro, Chairman of the Board of Directors of Intesa Sanpaolo Bank, Italy’s leading bank, deciphers the distinguishing features of the Italian market and its fabric of SMEs.

What are the main characteristics of the SMEs that make up Italy’s economic fabric? Are they mainly family-owned, widely-held or owned by investment funds?

Gian Maria Gros-Pietro: Family-owned companies form a large part of Italy’s industrial mix: over 60% of listed companies are family-owned, and over 50% of these companies generate revenue of over €50 million. A study of a sample of medium-sized Italian companies showed that at 70.5% of them, family members made up more than three-fourths of the Board, vs 5.6% whose board members had no family relationships.

First, we must lay to rest certain myths about family-owned companies. Not all family firms are small (just think of Benetton, BMW, Esselunga, Ikea or Walmart), have shorter lifetimes (the “three-generation rule” says that the first generation builds wealth, the second maintains it, and the third destroys it), earn less, have less shareholders’ equity, or are less supportive of meritocracy.

Family firms possess distinct characteristics: among other features, they offer stable management prospects over the medium and long terms, they have close ties with the community, and their objectives, which are not solely financial, can lead them to develop unique competitive advantages. That said, an economic model in which the family’s control is almost exclusive, foreign investors have only a limited presence, and a smaller stock market can hinder the efficiency, vitality and expansion of Italy’s industrial economy.

Among SMEs, especially in the mid-sized segment, we are seeing the growth and development of new, highly competitive companies increasingly likely to innovate and compete internationally. The performance of companies in this segment is positive and higher than the manufacturing industry average in terms of revenue increase and margin growth.

Which industries do you see as dominant? Are there two or three with especially promising growth prospects?

G.M. G.-P.: To make that kind of assessment, we need to look beyond short-term performances and include the factors that determine the competitiveness of each industry.

In its annual report on the competitiveness of the manufacturing industries, ISTAT, Italy’s national institute of statistics, publishes a multi-factor competitiveness index to measure the performance of all industries against that of manufacturing. The index ranks manufacturing sectors on four competitiveness criteria (cost, profitability, foreign market performance and innovation). According to the latest available data (the 2015 Italian competitiveness index), the beverages, pharmaceuticals & chemicals, machinery, electrical equipment and automotive industries occupy the top five slots. These are sectors featuring above-average company size, productivity, international propensity and innovation. These sectors were also the most competitive after the crisis and, generally speaking, saw improvements in all of the areas measured by the index.

Estimates produced by Intesa Sanpaolo’s research department, based on an index made up of three variables (revenue growth at unadjusted prices, cash flow less interest expense, and the trend in cash flow less interest expense), also showed that the machinery, pharmaceuticals, electronics, transport, and food & beverage industries offer the strongest growth prospects in domestic and international markets.

How would you describe the governance of Italian firms? Do you think they are managed differently from French companies?

G.M. G.-P.: Italian family firms have changed enormously in the past few decades. Without making any generalisations, many firms are no longer hostile to the presence of foreign executives and are no longer wary of expanding in fast-growing, geographically distant markets. The upshot is that the “boutique” label once put on family businesses no longer applies to today’s “Made in Italy” champions. When we compare them to their French competitors, we find that Italian companies are often more creative and more agile.

But France has other strengths. The fashion industry is emblematic in several ways: Italy is home to the most coveted brands, but often rather than expand through acquisitions, they lose their initial momentum and run out of steam. The brands are acquired by big French players, which employ excellent financial strategies to make them grow.

In my mind, Italy’s weakness is not in its companies, but in the system that discourages groups from being formed and achieving success and that encourages disposals and offshoring. I think that tackling this problem should be our country’s main aim.

What relationship exists between SMEs and private equity funds? Are international funds more present than Italian funds?

G.M. G.-P.: There is no question that the relationship between Italian SMEs and private equity funds is changing. The double-dip recession of these past ten years put a heavy strain on the growth potential of our SMEs: traditional bank funding was scarce, and companies increasingly became either winners or losers. The SMEs that managed to survive and grow were able to innovate and obtain the required funding by seeking it from diversified sources.

Concretely, the relationship between SMEs and private equity funds is as follows. The number of private equity and venture capital transactions remains low, at 311 in 2017 vs 322 in 2016, according to data from AIFI (Associazione italiana del Private Equity, Venture Capital e Private Debt), but the amount invested in 2017 (excluding large contracts) rose 45% from the previous year, to €4.9 billion. Based on AIFI data, the presence of international players in the Italian private equity market is strong. Of the €4.9 billion invested in 2017, 63% came from foreign players, with an average of about €42 million per investment, vs an average of €7 million per contract signed by domestic players.

A new instrument – the special purpose acquisition company, or SPAC – has proven to be very important for SMEs. SPACs are small private equity funds that acquire control of a target company and list the shares. For the company, this is a faster and less costly solution than a traditional IPO, with significantly lower advisory and compliance costs.

What can SMEs expect from a private equity fund?

G.M. G.-P.: Italian SMEs are innovative, creative and of high quality. But many small companies first need a better organised, more structured growth process and access to more diversified funding sources, in addition to more cash. These needs become most evident at key moments of the SME’s lifecycle, when it is obliged to handle situations such as passing from one generation to the next, expanding into new markets, growing through acquisitions, and adapting to new business realities.

Private equity funds must be able to contribute the human resources required to propose structural, medium-term growth plans, and follow up on their implementation. They should not underestimate the amount of capital needed to optimize the structure of the company’s financial commitments and cover the investments.

When a private equity fund becomes a shareholder in a company, the business owner and the investor must actively work together toward the common goal of achieving growth and success. The fund must not only bring its experience and strategic skills to the table, but also a significant and international network of contacts, while driving the adoption of best practices from outside the company. In turn, the target SME must demonstrate full transparency and impeccable professionalism with respect to the fund, giving investors access to all information. The company must also participate by identifying any problems that may arise and suggesting solutions.

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Apax Talks is a digital magazine aimed at company managers. It presents growth levers for SMEs, with a focus on TMT, consumer, healthcare and services sectors.