Minority investments are an increasing feature of the Italian PE market. One key driver of minority investments is demand from many entrepreneurs, founders and small and medium-sized businesses for funding to refinance existing debt, pursue acquisition opportunities or to expand their operations. Many are discovering that funding is unavailable from traditional sources such as banks on terms that they are willing to accept. Separately, sponsors are also teaming up with co-investors to share some of the risk associated with an investment, resulting in the PE fund holding a minority stake.
Italy has a wide array of small and medium-sized businesses, many owned by families or entrepreneurs. With additional investment many of these businesses could grow locally and internationally, but some owners are reluctant to hand over full control to a third party investor. For such businesses, a minority investment can be an attractive alternative. For example, in December 2014, US PE firm Catterton acquired a minority stake in Intercos, an Italian cosmetics company. The founder and CEO, Dario Ferrari, retained a majority stake and remained in his management position.
Minority investments by PE sponsors may often bear a striking resemblance to a venture capital investment, but there are significant differences.
First, PE funds require control over key business decisions, such as: the issuance of new equity, sale of the company, change of control, change in governance, related-party transactions, acquisitions or dispositions of assets outside the ordinary course, termination of key managers and the adoption of a new management incentive arrangements. The Italian market is increasingly accommodating these norms.
Second, even without a controlling stake, PE funds require control over exit, including timing of exit. In minority investments, PE funds will often attempt to exercise control over exit through a variety of means, such as a put right, a drag-along right or the right to cause a target company’s IPO after a specified period of time. These exit control rights are not typically found in venture capital “start-up” minority investments. Again, the Italian market is accommodating these exit timing requirements with terms for liquidity opportunities following a two to five year period, rather than the traditional five to seven year period.
In Italian growth industries such as fashion, consumer goods and technology, there are opportunities — with the right controls in place — for PE houses to make highly profitable investments. Increasingly, we have seen minority investments as a feature in the Italian market, and expect to continue to see them in the next few months.
KEY OBJECTIVES WHEN MAKING A MINORITY INVESTMENT
- Control over key business decisions (through veto rights or negative control), to prevent actions being taken without consent.
- Control over exit (put right, drag-along right, forced IPO) and timing of exit (two to five years rather than the traditional five to seven years).