From entrepreneur to investor: the Italian experience of resource reallocation

For entrepreneurs, selling a business marks a big change on a human and professional level. On a personal level, the sale can be an emotional journey but one that opens up new beginnings and new perspectives. Professionally, the exit marks a transition in the entrepreneur’s role – from business owner to institutional investor. A sale generates a so-called ‘liquidity event’, in which the store of wealth in the business is freed up and becomes investible. This provides an important economic function: as the business changes hands, the realised wealth becomes available to invest in new ideas and projects.

In Italy, some EUR 300 billion was freed up by liquidity events in the 2013–2022 period, an analysis by Pictet Wealth Management in collaboration with the School of Management of the Politecnico di Milano (POLIMI ) showed.

As many as 2,365 liquidity events – the total or partial sale of businesses – were identified over the 10 year period, and for the 1,055 deals with disclosed values, the total amount was eur141.66 billion (eur140.45 billion if only deals with known value greater than eur10 million were considered). Projecting this value over the entire sample of liquidity events, a total flow of about eur300 billion was estimated for the period under consideration.

The data also highlighted th e dynamism and, at the same time, the attractiveness of Italian entrepreneurship. Indeed, shifting the focus to the 853 liquidity events with known values and above the threshold considered relevant of eur10 million, the median value of the transactions was eur33.7 million. Of these, more than 90 percent of the companies were unlisted and more than 40 percent were between 20 and 50 years old, active mainly in the Northwest – with Lombardy leading the way thanks to more than 300 deals with disclosed values.

For almost half of the companies, their majority operation was in the manufacturing sector. These were often SME s – the engine and backbone of the Italian economy, with assets of less than EUR 50 million, where ownership was, in 57 percent of cases, divided between members of the same family. In 14 percent of cases, ownership was shared between several families, and in 29 percent of cases it belonged to a single entrepreneur.

The total flow of EUR 300 billion created important added value for the country, representing a resource for reallocation to new business ideas, innovative start-ups, SME s and new investments in the ‘real’ economy. Indeed, liquidity events have become a strategic theme in wealth management in Italy, where the careful deployment of the wealth flows generated plays a central role in enabling Italy’s entrepreneurial and economic assets.

By supporting new investors in the optimal allocation of resources, a virtuous circle can be created where the flows resulting from these deals are then injected back into the market in the form of investments in new ideas and projects, having a positive impact in the real economy as much as in the financial markets.

Italian family businesses represent one of the most dynamic and innovative entrepreneurial classes in the world. This is not lost on investors, especially private equity funds, which often play a key role in liquidity events. Analysis of those who invested in Italian companies, found that more than half the buyers (437) were corporate, equally Italian or foreign. In general, private equity funds proved to be central players in the liquidity events of family businesses in Italy, where they were involved in at least 179 cases.

As the total number of buyout deals conducted in Italy between 2013 and 2022 by private equity funds exceeded 1,000 investments (which included deals with disclosed and undisclosed values), the analysis confirms that family businesses represent an important pool for fund origination. Moreover, for private equity funds that took over the shares held by families at liquidity events, the average value of the annual IRR (Internal Rate of Return), i.e., the return subsequently earned from the investment, was 36.23 percent, compared to the median IRR of 29.08 percent.

Considering that, according to data calculated by KPMG and AI FI, between 2017 and 2021 the aggregate average IRR of the private equity market in Italy was between 12.5 percent and 32.1 percent, these investments clearly earned decidedly competitive returns. By taking stakes in family enterprises with solid core business propositions, private equity funds can help them grow and organise themselves in a more structured way.

Moreover, the wealth freed up from liquidity events represents an important flow of new resources in Italy, which spills over into the country’s economy. Thus, successful liquidity events, assisted by practitioners who specialise in wealth management, can create opportunities for the country at large as well as the sellers.