International investors are showing mild – although increasing – interest in the Italian market as a weak euro, combined with generally depressed valuations, give them a chance to buy into 'Made in Italy' brands.
Despite low overall inflows of foreign investment and an unfolding banking crisis, crossborder M&A deals targeting Italian companies have been on the rise, as well as private equity activity. The government, led by prime minister Matteo Renzi, is now trying to capitalise on the relative political stability of the past few years to push through a set of reforms aimed at easing up the country’s business environment.
Italy’s FDI appeal never recovered after the financial crisis of 2008, with FDI inflows falling by 12.7% to $20.3bn in 2015, or half the pre-crisis peak touched in 2007, according to Unctad figures. Italy’s FDI-to-GDP ratio stood at 0.2% in 2015, the lowest level among G8 economies after Japan, World Bank figures show.
“This is mainly due to foreign investors’ negative perception of the Italian system based on what investors hate the most, which is uncertainty,” says Emanuele Serafini, director of the FDI desk opened in London by the Italian Trade Commission.
“However, over the past two years the government has started to put great emphasis on changes in the political and constitutional frameworks and the judicial system in order to overcome impediments to full implementation of necessary reforms.”
What is more, the government is launching special FDI desks in major global financial centres such as London and New York to better engage with foreign investors. “All those measures and reforms, in addition to a number of incentives at national and local level, have created a more favourable and trusted environment for foreign investors,” says Mr Serafini.
The M&A market is sending out some first signals of a renewed interest in Italy from foreign investors. Total M&A deals amounted to an all-time record of 591 in 2015, and their overall value was $61.96bn, the highest since 2007, according to Bloomberg figures. Foreign investors made up half of these deals, with companies such as the Chinese state-owned ChemChina picking up local blue chips such as Pirelli for about €7bn.
And if 2015 was a record year for M&A worldwide, deals in Italy continue to be on the rise in 2016 (up by 8% year on year in value terms), despite a general slowdown in the European market, with foreign players such as Germany's Heidelberg Cement wrapping up a $4.5bn takeover of its Italian peer Italcementi in July.
Foreign financial investors are also taking indirect exposure to the Italian market through local private equity vehicles. Private equity and venture capital fundraising doubled to record levels at €2.5bn in 2015, with foreign capital making up half of it, according to figures from the Italian Private Equity, Venture Capital and Private Debt Association. At the same time, capital buy-out almost reached 2007 levels at €3.3bn, with international players accounting for 77% of the deals.
Despite these early improvements, a number of challenges await Italy. The balance sheets of Italian banks appear under severe stress as non-performing loans are quickly growing, and Mr Renzi faces a delicate referendum to uphold its constitutional reforms later in 2016. Besides, economic recovery remains sluggish. Foreign capital is starting to flow in again, but it is a long way for Italy to regain the confidence of the international investors.