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Private Credit 

Josie Shillito

Not typically known for its private debt activity in comparison with Germany, France, the Benelux and the UK, Italy is nonetheless showing growth in private credit fundraisings and financings. Paolo Pascarelli, a senior originator with a long history in European leveraged finance most recently with UniCredit, talks 9fin’s Josie Shillito through the market.

We understand private credit activity in Italy grew significantly in 2022…

It did. As shown by a recent report prepared by AIFI (the Italian private equity, venture capital and private debt association) and Deloitte, the volume of private credit transactions in 2022 reached €3.2bn, a record level, increasing 43% on 2021.

Whilst this amount is on the low side when compared with some of the largest European private debt markets, it represents more than two times the volume of transactions closed before the pandemic—that is €1.3bn in 2019.

Well, there are several drivers. To start with, the Italian buyout market grew significantly last year and, according to AIFI, around 70% private debt transactions by volume in 2022 were used to finance LBOs. 

In addition, as with the rest of Europe, large, widely syndicated leveraged finance transactions in Italy have slowed, particularly in the second half of 2022. 

For instance, high yield issuance volumes collapsed by around 60-70%. With a couple of exceptions, private debt has replaced high yield bonds as a principal source of financing for large LBOs in Italy, just as we have seen in other European countries.

The substitution of public, widely syndicated LBO financings with private debt was the case for instance for the LBOs of Doc Generici, IRCA, Neopharmed Gentili and a few others.

And what about the traditional private debt space of middle market?

It continues to grow, and this is a long-term trend supported by the large number of small-to-medium size companies in Italy and by recent healthy M&A and LBO activity in this space.

The Italian mid market for leveraged debt, that is, between €25m and €250m of total debt, has experienced a record year. Looking at Dealogic's statistics for bank leveraged financings, 2022 showed a volume close to €19bn, equal to the record volume registered in 2021.

While these statistics include some bond bridges and corporate acquisition financings, they also reflect an active mid market in LBO financings. Buy out transactions reached a volume of €11bn in 2022, double the size of 2021!

The first four months of 2023 have shown similar trends, with the market for large LBOs on hold and a few high yield bonds successfully priced to refinance bridges or address maturities in the next 12-24 months. 

On the other hand, the mid market continues to show healthy levels of activity, albeit somewhat slower than in 2021, with a dozen LBO transactions closed or in exclusivity phase.

Some of these will be bank financings, no?

Yes, banks continue to be active players in Italian mid market LBO financings. However, the number of banks active in this market is limited and the trend in favour of private debt is also at play in Italy. 

In addition, we see a growing acceptance of the private debt instrument by Italian entrepreneurs, CFOs, corporates and sponsors. In fact, AIFI estimates that more than 80% of the 2022  private debt financings by number were used to finance SMEs.

And when it comes to private credit funds, what’s the landscape like in Italy?

Very generally speaking, international funds are able to operate with greater firepower in Italy, while Italian domestic funds tend to be smaller in size. You can see from the AIFI report that domestic and international funds are split 50:50 on number of transactions made, but that in terms of volume of transaction the split falls 20:80 respectively.

However, domestic funds are growing and fundraising larger and larger volumes. What was once a fund size of €100-150m will now be €200-250m or more.

In terms of international debt funds, we see Goldman Sachs Asset Management, KKR, Blackstone, Carlyle, Arcmont, CVC, Tikehau, HPS, Muzinich and Kartesia, to name a few. Then in terms of domestic players, you have several institutions like Anima, Clessidra, Equita, Vercapital, Finint, Merito and a few others.

There’s public policy support for private credit in Italy, isn’t there?

There’s certainly support for alternative ways of financing companies following the GFC. The government wanted to ensure that there was alternative capital availability and set up, among other things, Fondo Italiano di Investimento (FII) in 2010. 

FII is now Italy’s largest institutional investor in private capital and has raised two private debt fund of funds so far. Acting as an anchor investor to domestic private credit funds, FII has been instrumental in developing the Italian private debt market and is expected to continue to do so.

Is there anything that makes the Italian private credit market unique?

Yes, we can’t structure TLBs in the same way as the rest of Europe, and the number of banks active in the mid market LBO space is limited. This opens opportunities for private debt funds.

Why can we not structure large TLBs ? Because Italian law restricts lending to Italian borrowers by non Italian lenders not authorised to invest in loans. However, most private debt funds generally structure their financings as a bond or a private placement, with no material effect on the coupon or structure.

Paolo, you started your career in Germany, followed by 22 years in the UK and now Italy. Tell us about this!

I very much enjoyed working in all of these countries and remain very fond of London having spent such an extensive part of my career and personal life there. As an origination banker, the advantage of Milan is proximity to clients and, in a post-Brexit world, there are numerous other reasons why a Milan location is preferable. From a personal point of view, I believe Milan offers many attractive features and incentives particularly for families with young children. The proximity to excellent ski and seaside resorts within two or three hours by car is definitively a bonus!

9Questions — Paolo Pascarelli, Private credit Italia

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