Italy does not have as consistent a private equity culture as other large European economies. Last year, private equity investment as a whole made up just 0.110% of its gross domestic product. This placed Italy twelfth in the European rankings, behind not only the traditional leaders in private equity in northern Europe, but also Spain, Portugal and Hungary.
Pension fund investment in private equity went up dramatically last year. In 2004, e274m-worth of private equity funds in Italy - 17.1% of the total - was raised from pension funds. This was the biggest-ever amount recorded in Italy, and was an 80% increase on the e152m contributed the previous year, which made up 8.3% of the total.
However, according to the Italian Private Equity and Venture Capital Association (AIFI), all of this was from non-domestic investors.
Max Nardulli, managing director, head of southern Europe, Goldman Sachs Asset Management, says: “In our opinion, pension fund interest in private equity as an asset class is limited and marginal, even if it is growing in relative terms.”
There are a number of reasons behind this lack of interest, including legal and fiscal difficulties, and also a conservative approach to portfolio management.
Pension funds in Italy can be split into three main types: the so-called old funds, originally set up as single-company pension schemes, and the two new types: a national, closed pension fund for specific sectors such as metal workers, and the ‘open’ private pension funds for individuals who want third-pillar protection.
The so-called old schemes have no investment restrictions, and are therefore able to invest in private equity.
The new schemes are covered by Decree 703/96, which permits investment in non-listed companies with quantitative restrictions. These schemes can also invest in closed-ended mutual funds (the usual vehicle for private equity), up to 20% of their portfolio and up to 25% of the value of the mutual fund.
There will shortly be changes in pension fund law, but according to MEFOP, the association for the development of the Italian pension funds market, it is possible that this will not affect investment restrictions, as the reform relates more to contributions and severance pay.
“Private equity is not a commonly-used asset class among Italian pension funds,” says Daniela Konrath, partner at Pantheon Ventures in the Brussels office, and a member of the firm’s European investment team. “There is only one Italian fund of funds, for example. There are not many Italian pension funds, and those that do exist are not very big.”
Pantheon Ventures itself has only one pension fund client in Italy, and this invests at a small level in European and US fund of funds.
Konrath says: “In addition, private equity is a young industry, so not much is known about it. Pension funds tend to have rather conservative investment strategies, and private equity is seen as more risky.”
“Furthermore, some pension funds can’t invest in private equity for tax reasons – the tax situation can be very different from one institution to another,” she says.
Italian pension funds can only invest in private equity via an SGR, a custom-made management company which is independent of the banks or asset managers setting it up. SGRs have to be approved by the Italian authorities.
Maurizio Berra, head of institutional clients at investment managers Pioneer Investments, which runs the portfolios of a large number of Italian pension funds, says: “There has been a certain amount of discussion about private equity, and I can see a certain amount of interest. But one of the problems in changing the law is that pension funds are obliged to value their assets, and for alternative assets such as private equity and hedge funds it is a problem in many cases to get daily valuations.”
According to Berra, up till now, private equity funds in Italy are subscribed to more by high net worth individuals than by institutions.
However, he says that those Italian pension funds which do invest in private equity do so mainly via fund of funds. They also have a geographical preference for Italy.
“This is perhaps because they want to understand what they are doing, so they stick to their own country,” says Berra. “They may then do something more complicated. They look for an absolute return from the asset class of at least 8-10%.”
Sergio Trezzi, Invesco’s head of business development in southern Europe, says: “Interest in private equity among pension funds is increasing. The existing old funds are increasing their investments mainly through fund of funds. This avenue is easier because it gives them more flexibility in terms of investment choice. There is less risk because the investments are more diversified – for instance, they do not just contain early stage companies, but also buyouts.”
Giampio Bracchi, AIFI president, says: “The AIFI continues to co-operate with the institutions and the government in order to promote the participation of pension funds in private equity. Because of the recent Italian welfare reform, the role of pension funds and their capital under management will increase dramatically in the next few years.
“A large part of the total TFR amount (the annual sum of money set aside by the employer and paid to the employee when he leaves the organisation) will be invested in pension funds. AIFI will be proposing that pension funds are forced to invest a percentage of these new assets in closed-ended funds investing in small and medium-sized enterprises, along the lines of the regime for French insurance companies.”
Berra is also optimistic: “I think that it will take time for things to change, but I’m pretty sure that in the end, pension funds will be allowed to invest in alternative instruments.”