Michele Semenzato: “Funds risk closing deals at any cost, without a clear path of value creation for the company”

The co-founding partner of Wise Equity, one of the leading private equity firms in the Italian mid-market, talks to us about current trends, market challenges, and Wise’s strategy.

Posted Thursday, December 2nd 2021
Michele Semenzato: “Funds risk closing deals at any cost, without a clear path of value creation for the company”

Leaders League: What trends have you been seeing in the Italian private equity market this year, as the world has begun to recover from COVID-19?

Michele Semenzato: The number of players in the market is developing very quickly; there are many new entrants, especially ones not historically present in this space. Family offices and teams looking for club deals are relative newcomers. Many international LPs (limited partners) are increasingly looking for direct investment opportunities in the Italian market.

As far as the real backbone of the country goes, though expectations aren’t high for internal demand or consumption, export-oriented companies will do well. Our core business is export-oriented players.

 

What makes Italy an attractive market for international investors, and what could the country do to become more attractive to investors?

The Italian market is more appealing than many other European markets in terms of valuations; this attracts a lot of interest. Italy will eventually be benefitting from the pandemic in one way at least: together with Germany, it is a core European manufacturing powerhouse. Its role in righting the supply chain will work in its favour.

The main concern international players have is our judicial system, which is very slow and cumbersome. Processes in Italy can take two to three years, and then they can be appealed. Judges are too few.

We’ve had many years in which we didn’t have, let’s say, Europe’s best government – though right now it’s the opposite! Mario Draghi is really working to make the country more attractive to foreign investors. For one thing, he’s been ensuring that Italy doesn’t default – always a key idea for him, even when he was head of the European Central Bank. But he’s also ushering in reforms that are making the country more competitive.

 

What challenges do you foresee for private equity in Italy over the next few years?

Given that valuations are being impacted, and given the number of new entrants, there could be situations where people want to close deals at any cost without a good path of value creation for the company. The deployment of dry powder in a way that actually creates value will be the biggest challenge. When you buy companies at very high prices, your ability to transform them and help them grow will be tested even more – there’ll be fewer opportunities to create value through multiple-expansion.

I think we’ve been waiting for some kind of an impact on the stock market for quite some time, but the market keeps going up. Soon there will be a deep revaluation, and the financial structure of deals at that moment will be challenged. Buying companies at 10 times EBITDA will haunt you when there’s a downturn.

We say to ourselves: keep your bar straight, keep applying your strategy, don’t be in a rush to deploy capital. We’ve invested 50% of the money in the fund we raised in mid-2019; we’re happy about that, the companies are doing great, and we won’t be rushed to invest the rest if we don’t find opportunities at the right price and with the right risk profile.

 

What is Wise Equity’s positioning in the private equity market, and what makes it stand out?

In the lower mid-market space, we’re one of the most established players – we’ve been investing for over 20 years. We certainly think we have a strategy that can provide value creation.

We like to invest in niche leaders. Our companies are mostly companies that are the best in the world or Europe, but in a very specific vertical. Nonetheless, they have broad geographical reach. In the portfolio of our latest fund, 80% of the companies’ revenue is international. We tell our LPs that although we invest in Italian companies, we are not correlated to the Italian market. Our players are international.

We are not the best people to buy great assets at full price – we typically buy assets where we have an angle, or that are off the market for some reason. This doesn’t provide high volumes of opportunities, but in the five most recent companies we’ve invested in, we’re already seeing a multiple of 2.7.

We are six partners who have been working together for 20 years. We have a very knowledgeable and helpful junior team; we hire people from the best management consultancies – Bain & Company, McKinsey & Company, Boston Consulting Group, Roland Berger – and are very close to our management teams.

 

How has Wise Equity grown in its approach since its inception? What wisdom, in terms of either investment or management, has been gleaned since beginning?

The Great Financial Crisis (GFC) taught us two key lessons. Firstly, we learned not to over-leverage companies. This reduced the likelihood of being in trouble when a crisis hit, and indeed, the COVID-19 crisis hit most of our companies but didn’t result in liquidity problems for them. Moreover, we are very transformational, from an organic growth perspective but also in terms of buy-and-build plays. So high leverage isn’t a good option for our companies, because we need to have flexibility in their capital structures given our transformational strategy.

The second big lesson we learned is that our companies were too focused on the Italian market. Given the GFC saw a double-dip recession in Italy, we learned the cost of putting too many eggs in an Italian basket. We want to be more correlated to the world markets in terms of which markets our portfolio companies target.