Recent legislative changes announced by Italian Prime Minister Matteo Renzi will allow international funds to originate loans in Italy. Prior to Law Decree No. 18/2016, only Italian alternative investment funds were expressly permitted to lend directly to Italian borrowers. The decree, announced in February this year, looks like an exciting new prospect for private debt managers who have previously been unable to access the region.
Traditionally, providing debt to Italian mid-market companies where fund managers did not have presence in Italy had been restricted to the bond market – a complex and costly process for borrowers and lenders. However, the latest legislative changes have altered the type of product that international alternative lenders can offer to investors: it enables them to offer loans to companies and opens the door to non-bank lending.
Preqin’s funds in market data on Private Debt Online shows that there are 10 funds currently raising capital that focus on the Italian debt market. The majority of these funds are run by Italy-based fund managers; however, there are signs that international managers are beginning to move into the market. Muzinich & Co, a New York-based private debt firm is currently raising capital for Muzinich & Co Italian Private Debt Fund, a direct lending fund focusing on small and mid-sized Italian enterprises, with annual revenues between €50mn and €500mn. Another firm offering exposure to the Italian debt market is UC Capital, a Spain-based private debt manager that is looking to raise €150mn for its special situations Lion Growth Fund, which will invest 33% of its capital in small businesses based in Northern Italy.
However, this legislation does have some constraints: in particular, single transactions cannot exceed 10% of total commitments to the fund. The freedom to originate loans is also restricted to closed-end vehicles and the leverage ratio between total assets and net asset value cannot exceed 150%. Fund managers will also be required to report all debt transactions to the Bank of Italy.
Despite some restrictions in the legal framework, the opening up of the non-bank lending sector to international funds will undoubtedly offer benefits to fund managers, businesses and investors. The private debt market can potentially offer greater flexibility to borrowers, provide investors with higher returns in a low-interest environment and add further diversification possibilities for private debt fund managers.