BNP Paribas Investment Partners is seeking pension funds, banking foundations and other institutional investors for a new closed-end fund investing in bonds issued by small and medium-sized enterprises (SMEs) in Italy – so-called minibonds.
The BNP Paribas Bond Italia PMI will target companies with an annual turnover of less than €250m.
Elisa Ori, head of institutional business development at BNP Paribas Investment Partners, said: “Companies with a turnover below this level are normally unable to finance themselves in the liquid Eurobond market, via a syndicated bond issue. The aim of this fund is to provide these companies with market-based financing as an alternative to bank loans.”
Ori added: “The asset class is a good opportunity for long-term investors because it offers diversification and a good risk/return profile.
“The liquidity premium offered by the asset class is attractive, and the yield can be double that of a Eurobond of similar quality.”
She said SMEs were potentially nimbler and more able to adapt to a changing economic environment than large companies.
Furthermore, their operational leverage might be more contained because of lower fixed costs, leading to faster adjustment of the production capacity.
On the other hand, SMEs might suffer more from price competition.
Minibonds were created in October 2012 by Italy’s then government to give SMEs an alternative source of finance as bank lending dries up.
Generally, they enjoy the same tax treatment as debt issued by listed companies, including tax relief on interest costs and issuance expenses.
In addition, there are relatively few, and simplified, regulatory requirements for issuing the debt instruments.
BNP Paribas Bond Italia PMI’s investable universe is made up of 1,500 companies selected on the basis of risk profile, type of business, turnover, industry outlook and international business profile.
The fund will hold bonds from between 25 and 40 issuers.
There will be a maximum holding of 8% for BBB-rated issuers and 5% for BB-rated issuers.
Holdings will include both bullet bonds and amortising bonds.
Ori said: “We have not set a maximum percentage per region, but we expect a large part of the investment to be made in the northern part of the country, given the concentration of the GDP in that area.
“To ensure good diversification, we will allocate investments by industries, based on their weighting in the GDP and their financial outlook.”
Bonds will typically be fixed rate but variable-rate issues will also be considered to hedge risk.
The average maturity of the debt will be between four and five years.
The target yield to maturity will be around 6% per year, with a net return for investors of 5% per year.
Dividends will be paid at least annually.
Ori said: “The risk/return of the fund is particularly attractive compared with similar products in foreign markets, for example, France and Germany. We therefore expect foreign investors to show interest in this product.”
She added: “The profile of our fund is more conservative compared with others, as we want the asset class to start properly in the market, especially for investors such as pension funds.
“We have launched a multi-originator platform with strict rules to manage conflict of interest and ensure the alignment of information and interest between investors and originators.”
The fund’s target subscription is €150m, and the minimum investment is €1m.
The fund will have a seven-year lifespan once subscriptions close next October.
Financial consultancy Prometeia will act as the fund’s independent adviser, assisting with the screening of SMEs.