Trends and evolution of exiting activity in the Italian market
According to the AIFI 2020 report, in the last 5 years, in Italy, the divestments number and amountdivested has progressively decreased, as shown in the following table: in 2020, the divested amount, calculated at the purchase cost of the equity investments, reached 1.594 million euros, a decrease of 28% compared to the 2.216 million recorded the previous year. In terms of number, 81 disposals were recorded, also in this case a decrease compared to 2019 (132 exits), distributed over 67 companies. As regards to the breakdown of divestments into the types mentioned in the paragraph, the following two tables show the percentage distribution of the divested amount and the number of divestments by type in the years 2019-2020. In Europe, the sale to another private equity in operator also remains the most widespread type of exit, albeit to a lesser extent than in Italy (34% in 2019 and 35% in 2020). Also in Europe, in the second place, we find the Trade Sale which in 2019 amounted to 29%, lower than the 33% recorded in Italy, while in 2020 it amounted to 25%, higher than the 15% recorded in Italy, which suffered a relevant decline between the two years. During the investment cycle, the prospect of exit cannot be neglected, in particular when the company must evaluate a transformational acquisition that could positively or negatively affect the success or the exit. Think of how profitable it is, for the purposes of a subsequent valorization, to have increased the scale of the company and its degree of internationalization through a build-up strategy and have placed it in a range of higher multiples.
For the purpose of maximizing the capital gain inherent in the shareholding, the critical factors in the exit phase are essentially three: The choice of the time window to implement the divestment, which depends both on the performance of the company in the portfolio and on the conditions of the M&A and capital markets. Identification of the category of potential buyers (strategic and financial or public equity market). This choice will influence the adoption of the divestment process, which may result in an M&A or IPO path The decision on the sale strategy to best enhance the outgoing asset.
As already mentioned, exit planning should start early, with considerable thought being given to structuring and positioning the business to make it attractive to likely buyers, as well as networking and relationship development with these buyers. A lot of preparation should go into the robustness of the management plans, the detail of due diligence, and other reports. Efforts should be made to “warp up” the market, by making potential buyers aware of the upcoming sale several months before the formal process starts. The exit thesis normally forms a key part of the investment approach for any investment contemplated by the private equity firm. GPs need to understand the exit potential of the underlying business to recognize any elements of the proposed investment strategy that may actually detract from value creation. When deciding whether to exit or keep the company in portfolio for a longer period, a private equity firm should consider several strategic factors. Most likely, a successful exit strategy balances the company’s need for additional growth capital with the need to provide returns on capital to the fund’s LPs. The possibility of obtaining a capital gain depends primarily on the performance of the company in the portfolio.
The divestment decision is taken when the investment, thanks to its operating and financial results, allows for a return deemed attractive by the managers. The decision to divest, unless it is “forced” by the need to liquidate the investment quickly due to maturity of the terms of the fund, occurs at the end of a growth path. It therefore occurs when the three factors of value creation, the growth of operating profitability, deleverage and the potential arbitrage on multiples, allow a level of capital gain considered attractive. In addition to the historical series of economic and financial data, great attention must be paid to the trend of current trading, i.e., the performance of the company in the months in which the sale procedure will take place, both of the M&A or IPO, and its alignment with the budget of the current year. It is important to grasp whether the target firm is able to manage throughout the exit process by itself. Realization of an exit strategy may involve a relevant amount of time and money to pay for advisors, especially during an IPO process. Before conducting an exit strategy, a company will be subject to a stringent due diligence process to ensure that all of the proper systems and controls are in place. A company is in a position of strength if its track record shows it consistently outperforms performance targets.
A fundamental element to consider while choosing the right moment to implement the divestment is the condition of the markets, both for M&A and stock exchanges, and last but not least, for acquisition financing. In difficult market situations (i.e, a crisis or a so-called “black swan”), the mortality of deals increases exponentially, and there is a rapid downward pressure on prices, resulting in a gap between buyer and seller. Also, the IPO market is heavily affected by the shocks, with a mortality that occurs very quickly and with a flow of new stakes that is interrupted and that can remain at zero for months. The investor who is preparing his exit path must foresee the conditions of the markets with a few months in advance, and not base the choice of the exit timing only on the growth of company performance. In the presence of a crisis on the markets, the reaction of the buyers is very rapid and can even endanger the deals between the signing and closing phases, if there are stringent clauses of material adverse change or “subject to financing” in the contract. In addition, deals for which a sales contract has not yet been signed may suffer a decrease in transfer prices, extended due diligence times and a high risk of abortion of the deal as a whole. In the selling procedure, starting from the choice of the right moment, the active collaboration of all partners, in particular, those operating in the company, is necessary. Asymmetrical and uncoordinated behavior and interference in the sale procedure can create disruption and jeopardize the entire process. The need for alignment and responsible attitude must naturally also be extended to advisors, in particular to the investment bank responsible for the process, called upon to provide a reliable estimate of the future sale value and to suggest the most appropriate time window, avoiding any conflict of interest. Once the favorable exit period has been chosen, there is the need to choose the appropriate divestment channel, i.e., the type of potential buyers to turn to. For our purposes, we can identify four categories of interlocutors: strategic buyers, financial buyers, the stock market, and the original shareholders (buy back). Strategic buyers are groups active in the same sector as the target company, or in contiguous or similar sectors. Strategic buyers can operate in a diversification logic, even if the tendency to create conglomerates has faded in recent years. Theoretically they are the only ones who can benefit from operational synergies and in some sectors and historical moments they manage to pay consistent premium prices compared to other interlocutors. This disinvestment channel is defined as trade sale and is, for majority or totalitarian transactions, the most frequent at international level, even if with different weights from country to country. Unlike the secondary buy-out, which we will see later, this option almost never grants the private equity investor the possibility of a partial divestment and possible maintenance of an upside, given the buyer’s integration and rationalization needs and the absolutely different objectives between the two categories of investors.
It should be remembered that for a management recovering from a successful buy-out, the trade sale, especially if towards a direct competitor, it could be the less welcome solution, and the exit procedure could be conditioned, with a probable deployment of management in favor of other buyers. The sale of minority packages, in the absence of a shareholder who at the same time alienates a stake that allows a majority to be obtained, instead, sees strategic buyers as less likely candidates, due to the reduced possibility of integration and rationalization synergies. Exceptions can be justified only for investments in companies that have an extremely interesting commercial or technological profile, and that bring to the trade buyer synergies of well-defined revenues or technological advantages. Financial buyers, on the other hand, represent a very broad category, ranging from traditional private equity funds to permanent capital operators, up to including family offices and investor clubs. This operation is commonly referred to as a “secondary buy-out” and in recent years has seen a progressive development in all advanced markets, also due to the growing endowments of private equity funds and an ever-wider, liquid, and competitive acquisition financing market.
Giuseppe Incarnato – Chairman & CEO IGI INVESTIMENTI GROUP
