Breakingviews - Italian sovereign fund is a force to reckon with

MILAN (Reuters Breakingviews) - When Cassa Depositi e Prestiti (CDP) was founded 170 years ago this week, Italy did not yet exist as a nation. The institution’s main task was to finance basic infrastructure like roads and waterworks for the King of Sardinia-Piedmont, Victor Emmanuel II, who later became Italy’s first monarch. Fast forward to 2020 and the once sleepy state lender has transformed itself into a restless dealmaking machine, leveraging its 474 billion euros of total assets to build corporate champions in sectors ranging from telecommunications to financial technology.

An Italian flag flutters in front of Piazza Navona, as Italians remain under lockdown to prevent the spread of the coronavirus disease (COVID-19), in Rome, Italy, April 4, 2020.

Such activism has arguably much to do with the ambitions of its chief executive, Fabrizio Palermo, and with the government of Prime Minister Giuseppe Conte’s desire to reshape Italy’s industrial landscape. Since taking the top job in 2018, the former deputy general manager of shipbuilder Fincantieri and Morgan Stanley banker has worked to transform CDP’s mission. In just the past few months, the sovereign wealth fund has clinched deals to build large stakes in pan-European exchange Euronext, rising payments star Nexi and domestic developer Webuild.

Rome-based CDP is also working to merge the broadband networks of incumbent Telecom Italia and challenger Open Fiber, both of which claim CDP as a shareholder. In response to a government diktat following a fatal 2018 bridge collapse, CDP is also vying to replace the disgraced Benetton dynasty’s control over domestic motorway operator Autostrade per l’Italia. These ventures come on top of pre-existing holdings in local heavyweights such as oil group Eni and mail-and-parcels player Poste Italiane.

“We decided to rationalise our portfolio but also to sustain the companies in it with a strategy of trying to create champions on one side and continue to develop infrastructure on the other,” Palermo told Breakingviews on the eve of the group’s 170th anniversary. The capital CDP is investing is “permanent, patient and dynamic,” he said.

The focus on infrastructure – albeit with an expanded definition – plays to CDP’s roots. The group, which is 83%-owned by the Italian treasury with the remainder in the hands of banking foundations, funds itself chiefly through postal savings as well as bonds. It helped build Italy’s first telegraphic network and its first motorway; it’s still financing a school a day, says Palermo.

Today, however, the focus on equity investments is the priority. With some 23 billion euros’ worth of stakes in listed companies – or 5% of the blue-chip FTSE MIB index as of June – CDP is already Italy’s largest stock picker. That compares to the French state’s investments in listed and unlisted companies, at just over 100 billion euros at the end of June, according to data provided by CDP. With its cheap funding giving it a greater tolerance for lower returns than, say, private equity funds, CDP wants to be a bigger Italian economic actor, explains Palermo.

CDP is arguably filling a void. Excluding state-backed groups, most listed Italian companies are dwarves compared to European or American rivals. Local entrepreneurs have often had neither the capital nor the courage to scale globally through acquisitions. Instead, revered brands like jeweller Bulgari and tyremaker Pirelli have been snapped up by foreign predators. With Covid-19 likely to shrink Italy’s economy by some 10% this year, the need for cash will be more acute, and the state’s role more pervasive.

With an average 10% return on equity, CDP’s past track record looks impressive for a state-linked investor. But taking ever bigger bets carries an element of risk. The fund is, by statute, forbidden to invest in financially fragile companies. And banking foundations can de facto veto its deals. But the political pressure to prop up loss-making firms such as airline Alitalia has been mounting. Rome’s decision to create a 44 billion euro fund to inject capital into Italian companies, to be administered by CDP but kept separate from its accounts, has raised concerns that state money could be funnelled to keep politically connected zombie companies alive.

Nonetheless, professional investors seem relatively comfortable with CDP’s new role. Buyout funds Blackstone and Macquarie have joined Palermo for a possible 9 billion euro offer for Autostrade per l’Italia. And Euronext’s 4.3 billion euro cash purchase of Borsa Italiana, which CDP backed, was richly priced despite Rome’s potential conflict of interest in wanting that bid to succeed. The Italian fund paid market prices when agreeing to inject 700 million euros into the Paris-listed exchange operator, along with Milan bank Intesa Sanpaolo. And while Euronext granted CDP board representation in exchange for its support in the Borsa deal, CDP’s request to domicile the pan-European exchange’s headquarters in Italy was rebuffed, according to a person with direct knowledge of the deal.

Senior Italian and foreign executives who have dealt with CDP say it is professionally run, with many financial executives from international banks like Citigroup and Deutsche Bank. They also note that Palermo has been skilful at cultivating political backers, particularly from the 5-Star Movement, an anti-establishment but pro-state party that is the largest government coalition partner. Such ties will inevitably raise questions about Palermo’s ability to push back on political interference when selecting investments or choosing company directors.

It’s up to Palermo, 49, to dispel those concerns if he gets Rome’s backing for another three-year term next year. Board renewals at state-backed companies including Telecom Italia and Eni, and agencies like CDP, spark intense political horse-trading. Palermo, in any case, is clear about wanting to stick around: “In my career I have not changed many jobs,” he said. “I hope to stay here for long because this institution can do a lot for the country.”


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