Why Sovereign Funds Do Not Target Italy
Still fresh in our memory is the image of former Italian prime minister Enrico Letta flashing a €500 million check in his hand on his way back from a government mission in Kuwait. Actually it wasn't that much, given that it is the amount that sovereign funds of Gulf Arab states usually spend for a single operation, not for a whole country. Going beyond media news, Italy seriously trails behind in the European ranking of recipients of sovereign fund investment. According to data from the Sovereign Investment Lab, Italy has attracted only €5.4 billion in total sovereign fund operations, as compared to Germany's €25.2, France's €21.3, and even Spain's €13.3 billion.
What is this gap due to? Certainly there are institutional hurdles, such as the cost of bureaucracy, legal uncertainty, and all the other factors that act as a brake on foreign direct investment. There is however a barrier that is specific to sovereign funds: the size of our companies is too small to show up on their radar. And this for a banal reason: awash in cash (they manage more than €3.5 trillion in assets) and with little personnel, funds tend to focus on few large targets, which also saves on financial management costs and due diligence fixed costs. It is no coincidence that as soon as the size of our targets rises above a certain threshold, we find the presence in Italy of all the main sovereign funds. They are important shareholders in the country's few big corprations (Eni, Finmeccanica, Mediaset), in major banks (Unicredit), and control majority stakes in big real estate development projects (Porta Nuova in Milano and Sardinia's Emerald Coast).
Since there are few big companies in Italy, sovereign funds are less present than elsewhere. And their absence is something of a paradox, since the valuations of Italian assets are at historical lows and many companies, hit by the credit crunch, struggle to raise fresh capital. Whoever is familiar with sovereign funds knows that they appreciate Italian corporate brands and in this phase of economic uncertainty they are assessing investment opportunities also in mature markets. There is potential interest, but to receive incoming flows of international investment Italy must overcome the barrier of scale and select projects having an adequate size.
A possible strategy is to pick a number of medium firms that are leaders in market niches and are thus already export-oriented, so that they can achieve further growth in synergy with the sovereign fund. By exploiting the fund's network, an Italian company obtains, along with fresh funds, access to new markets and a new expansion path. Large Chinese and South-East Asian sovereign funds seem particularly apt to play this role as strategic partners.
Another tool to be considered is to design a fund devoted to Italian firms with high growth potential, to be financed by a consortium of sovereign funds and other long-term institutional investors. Through this investment vehicle, sovereign funds and other actors taking part in this joint venture can make large investments in the Italian market while maintaining good risk diversification. Last but not least, by using the formula of indirect investment, the risk of political interference, which has often limited cross-border investment from emerging economies, would be mitigated. And this means reaping a double dividend - economic and political.