Private equity in Italy: market and regulatory overview

A Q&A guide to private equity law in Italy.

The Q&A gives a high level overview of the key practical issues including the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company's managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.

To compare answers across multiple jurisdictions visit the Private Equity Country Q&A Tool.

This Q&A is part of the Practical Law multi-jurisdictional guide to private equity. For a full list of jurisdictional Q&As visit

Franco Agopyan*, Chiomenti Studio Legale

Market overview

1. How do private equity funds typically obtain their funding?

Private equity funds based in Italy continued to have a diverse investor base in 2011. About 21% of the capital raised was sourced abroad (a significant increase from the 2010 figure of 2%). The sources of funding were:

  • Funds of funds (34%).

  • Pension funds (11%).

  • Banks and other financial institutions (28%).

  • Insurance companies (15%).

  • Government agencies (6%).

  • Private individuals.

  • Private equity firms (1%).

The above statistics are sourced from Il mercato italiano del Private Equity e del Venture Capital nel 2011 published by the Italian Private Equity and Venture Capital Association (AIFI) (AIFI Statistics) (see box, Private equity/venture capital association).

2. What are the current major trends in the private equity market?

The global credit crisis and economic downturn continued to affect the size, nature and terms of private equity transactions entered into in 2011. While the Italian private equity and venture capital market experienced a slowdown in 2009 and 2010 due to the global financial crisis of 2009, 2011 has showed signs of recovery. In particular, the aggregate amount of private equity transactions entered into in 2011 totalled EUR3,583 million, marking an increase of 46% compared to the figure recorded in the same period of 2010.

Data sourced from the AIFI-PricewaterhouseCoopers report shows that the total amount of capital raised by funds operating in Italy in 2011 decreased to EUR1,049 million. This is a considerable decrease from 2010 levels when new capital raised reached EUR2,186 million.

During 2011, the total amount divested, calculated at cost (that is, not including capital gains), was EUR3,180 million (a significant increase of 225% from EUR977 million in 2010). The total number of divestments was 139 (a slight increase from 2010, when the number was 123), distributed over 121 companies (substantially in line with 2010).

The proportion of the amount of write-offs compared to the amount of divestments decreased substantially in comparison to 2010 (5% of write-offs in 2011 compared to 17% in 2010). The amount of trade sale or secondary divestments increased, a sign of a consolidating trend of recovery in the market.

3. What has been the level of private equity activity in recent years?


Funds raised by private equity firms in 2011 totalled EUR1,048 million, compared to EUR92,187 million in 2010. Funds raised were for the following:

  • Buyouts (15%).

  • Early stage investment (4%).

  • Expansion investments (65%).

  • Other investments (16%).


Private equity investments were made in 256 companies in 2011, substantially in line with 2010. The total value of all private equity investment in Italy increased from EUR2,461 million in 2010 to EUR3,583 million in 2011.

The main sectors targeted by private equity investments in 2011 were:

  • Industrial products and services (25%).

  • Consumer or commercial goods and services (19%).

  • Other professional and social services (13%).

  • Cleantech (9%).

  • Food and beverages (9%).

  • ICT (6%).

  • Retail and wholesale trade (6%).

  • Health care and social services (4%).

  • Pharmaceutical and biopharmaceutical industry (3%).

  • Transportation (2%).

  • Utilities (2%).

  • Construction (1%).

  • Leisure (1%).


The investment amounts by stage in 2010 were:

  • Buyouts. These represented 63% of the total, of which:

    • 18% were small;

    • 14% were medium; and

    • 31% were in the large and mega buyout classes.

  • Expansions (18%).

  • Early stage (2%).

  • Replacement capital (15%).

  • Turnarounds (less than 0.5%).


Exits accounted for EUR3,180 million in 2011, compared to EUR977 million recorded in 2010. Exits in the first half of 2012 accounted for EUR141 million, compared to EUR2,337 million in the same period of 2011 (source: AIFI statistics). The distribution of exits in 2011, net of any write-offs, was as follows:

  • Trade sales (51%).

  • Sales to other investors (secondary buyouts) (19.5%).

  • Public offerings (9%).

  • Other (20.5%).

All historical data in this question is from Il mercato italiano del Private Equity e del Venture Capital nel 2011, published by the AIFI, and from Private Equity Monitor Italia 2011, published by PEM Observatory.



4. Are there any proposals for regulatory or other reforms affecting private equity in your jurisdiction?

UCITS reform

Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITS) (UCITS IV Directive) reforms the rules in Directive 85/611/EEC on undertakings for collective investment in transferable securities (UCITS Directive).

The UCITS IV Directive and related directives and regulations have been implemented in Italy. The National Commission for Companies and the Stock Exchange (Commissione Nazionale per le Società e la Borsa) (Consob) has provided, in agreement with the Bank of Italy, some preliminary instructions to clarify these rules.

The UCITS IV Directive was implemented in Italy through Legislative Decree 47/2012, which supplements Legislative Decree 1998/98. The amendments concern, in particular the:

  • Definition of collective asset management, which now includes the commercialisation by a management company of units of UCITS that are either proprietary or of other management companies.

  • Possibility for Italian and harmonised management companies to establish and manage UCITS across EU borders, needing only authorisation from the competent authorities of their EU member state.

  • Provision where a management company can provide the ancillary service of custody and administration of financial instruments for the units of UCITS established by different management companies.

Other reforms

Other reform proposals include:

  • On 16 March 2010, the Bank of Italy issued a consultation document containing proposals that could affect the governance of private equity funds and the procedures for approval of the funds' rules. These proposals would introduce certain requirements for advisory committees (the bodies in which investors are represented). Although the consultation on the Bank of Italy's draft of regulation is finished, no rules have yet been issued to implement the regulation mentioned in the consultation document.

  • Law Decree no. 78/2010, as amended by Law no. 122/2010, sets out a new tax framework for funds. In particular, the definition of investment common fund referred to under Article 1(1)(J) of Legislative Decree 58/1998, has been changed, to strengthen the independence and plurality of investors requirements.

  • Article 36 of Legislative Decree 58/1998 has been amended by Law Decree 78/2010, which has added that an investment fund is liable, for the obligations assumed on its behalf, exclusively with its own assets. This seems aimed to clarify the liability of investment funds for their obligations. It also seems to imply that the unitholders of the fund should not be responsible for the fund's obligations, as the fund is liable exclusively with its own assets.

  • Article 37(2) of Legislative Decree 58/1998 has been amended by Law Decree 78/2010, which has established that the rules of funds reserved to qualified investors and/or speculative investors are no longer subject to the prior approval of the Bank of Italy.

  • Changes to the Banking Law no. 385/1993, aimed at implementing Directive 2007/44/EC amending Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector, have removed certain restrictions on investing in or purchasing a controlling interest in a bank by entities other than banks, including private equity funds.

  • Certain changes have been made to Legislative Decree 58/1998 to implement Directive 2007/44/EC. These relate to purchases, which must be authorised by the Bank of Italy, when they lead to gaining certain shareholding thresholds in a closed-ended investment fund (società di gestione del risparmio) (SGR).

Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) is designed to create a comprehensive regulatory framework for AIFMs, and may affect the management of private equity funds. It includes various regulatory requirements. However, the AIFM Directive has not yet been implemented in Italy. To date, there is no plan to implement it, despite the fact that the implementation should be carried out by 22 July 2013.


Tax incentive schemes

5. What tax incentive or other schemes exist to encourage investment in unlisted companies? At whom are the schemes directed? What conditions must be met?

The European Commission has issued guidelines in Communication Europe 2020 to facilitate access to venture capital and support the growth of new enterprises, using investment funds. According to these guidelines, any income from capital arising from participation in funds for venture capital (FVC) will not be subject to income tax. The FVCs and the target companies of FVC investments must meet certain conditions to qualify for the tax exemption. A decree of the Minister of Economy and Finance for applying these provisions and implementing the guidelines has recently been enacted.


Fund structuring

6. What legal structure(s) are most commonly used as a vehicle for private equity funds in your jurisdiction?


The most commonly used private equity fund is the closed-ended investment fund (società di gestione del risparmio) (SGR). The structure is well adapted to the process of selection, managing, monitoring and divestment of investments in the private equity industry, as:

  • The separation between the fund and the management company allows the management team to choose investment opportunities autonomously and rapidly.

  • The fund's duration allows the investors to achieve the result of their investments within a set period of time.

  • The fund's closed-end term allows the investors to exit from the fund the redemption or refunding of units at predefined and specific times. This allows the management company to have a capital reserve available that remains relatively stable and constant over time.

Decree no. 78 of 31 May 2010, as converted in Law no. 122 of 30 July 2010, strengthened the plurality of the fund's participants and the independence of the SGR, introducing a new definition of investment fund in Legislative Decree no. 58 of 24 February 1998. In addition, Decree no. 78 of 31 May 2010 also strengthened the separation between the assets of the SGR and the fund.

SGRs are similar to limited partnerships organised under English law, with dissociation between managers, fund sponsors and third party investors. However, SGRs are more strictly regulated (to provide protection to retail investors) than limited partnerships and therefore there is less room for contractual autonomy.

Other structures

Other legal structures that may be used include:

  • Joint stock companies (società per azioni) (SPA).

  • Limited liability companies (società a responsabilità limitata) (SRL).

  • Partnerships limited by shares (società in accomandita per azioni) (SAPA).

  • Co-operative and mutual insurance companies (società cooperative e mutue assicuratrici).

  • European companies (societá europee).

  • European co-operative companies (societá cooperative europee).

  • Special purpose acquisition companies (SPAC).

Foreign legal structures commonly used to invest in Italy include:

  • Luxembourg holding and financing company scheme (société de participation financière) (SOPARFI).

  • Luxembourg venture capital investment vehicle (société d'investissement en capital à risque) (SICAR).

  • UK limited partnership (LP) or general partnership (GP), usually investing through a Luxembourg special purpose vehicle.

7. Are these structures taxed, tax exempt or tax transparent (flow through structures) for domestic and foreign investors?


Italian investment funds (OICR) are not subject to income tax. Interest income, dividends and capital gains are received by the fund gross of withholding taxes (with some exceptions), and contribute to the year-end operating result of the fund.

Investor income is taxed as income or capital gains. The tax treatment depends on the investor's tax residency.

Italian tax residents. Investor income includes:

  • Income received by investors on the distribution of earnings by the fund.

  • A positive difference between the value of units on redemption and their value on subscription or purchase.

Investor income is taxed as follows:

  • Individuals and non-commercial entities (for example, banking foundations) are subject to a 20% final withholding tax.

  • Individual entrepreneurs' investor income qualifies as business income, and is included in their taxable income subject to progressive individual income tax rates.

  • Corporate entities' investor income is taxed at the ordinary 27.5% corporate income tax rate.

Capital gains realised through the sale of units are taxed as follows:

  • Individuals and non-commercial entities are subject to 20% capital gains tax.

  • Individual entrepreneurs' investor income qualifies as business income, and is included in their taxable income, subject to progressive individual income tax rates.

  • Corporate entities are subject to corporate income tax at the ordinary 27.5% corporate income tax rate.

Capital loss relief may be available.

Non-Italian residents. Non-residents' investor income and capital gains from the sale of units are subject to a 20% final withholding tax. An exemption applies to a non-Italian resident investor who is any of the following:

  • A resident, for tax purposes, in a country which allows for a satisfactory exchange of information with the Italian tax authorities (a country on the white list).

  • An international body or entity set up under international agreements in force in Italy.

  • A central bank or other entity authorised to manage the official reserves of a state.

  • Subject to certain exceptions, an institutional investor established in a white-listed country, even if it is not a taxpayer in its country of establishment.

In addition, non-resident investors who do not qualify for this exemption may be exempt from tax in Italy under an applicable double tax treaty.

Other structures

Joint stock companies, limited liability companies, partnerships limited by shares and co-operative and mutual insurance companies which are tax resident in Italy (see Question 6) are subject to Italian corporate income tax on their worldwide income. The ordinary corporate income tax rate is 27.5%.

Dividends received by an Italian company from participation in a company (excluding partnerships) benefit from a 95% discount on the taxable amount of the dividend, for an effective tax rate of 1.375% on the dividend. This exemption does not require a minimum holding percentage or minimum holding period. The same exemption is available, under certain conditions, for capital gains realised by an Italian company from the disposal of shares or quotas in Italian companies, and non-resident companies that are not resident in a tax haven.

A 20% final withholding tax is levied on dividends paid to both non-resident companies and individuals. For certain EU-resident companies, the final withholding tax rate for dividends received is 1.375%. These withholding taxes may be reduced or eliminated under an applicable double tax treaty.

Partnerships are tax transparent entities and are not subject to corporate income tax. Their partners are directly taxed on their share of the partnership's profits.

8. What (if any) structures commonly used for private equity funds in other jurisdictions are regarded in your jurisdiction as not being tax transparent (in so far as they invest in companies in your jurisdiction)? What parallel domestic structures are typically used in these circumstances?

As a general rule, non-resident companies are regarded as not tax transparent vehicles.


Investment objectives

9. What are the most common investment objectives of private equity funds?

Private equity funds typically seek to achieve medium-term capital gains on their investments, which are usually measured in terms of internal rate of return (IRR) multiples. Historically, private equity funds have targeted annual returns of 20% and above, although the economic downturn seems to have currently changed these expectations.

The average term of a private equity fund ranges from three to five years. During the investment and commitment period, the fund manager may require the investors to draw down new investments, while the remainder of this period is used by the manager to increase the value of the portfolio investments and seek profitable exit opportunities.


Fund regulation and licensing

10. Do a private equity fund's promoter, principals and manager require licences?

SGRs are treated as financial intermediaries, which must be authorised by the Bank of Italy to provide collective portfolio management services. SGRs must be set up as joint stock companies and have a minimum share capital of EUR1 million. SGRs' directors and auditors must satisfy certain reputational, professional and independence requirements. SGR shareholders must satisfy certain reputational requirements. An SGR's authorisation is subject to assessment by the Bank of Italy of the SGR's activity programme and organisational structure.

An SGR that manages private equity funds typically consists of:

  • A board of directors, which has final responsibility for decisions relating to the fund's investments and exits.

  • An executive committee, consisting of certain members of the board of directors, which assesses proposals presented to the board of directors.

  • One or more managing directors, who co-ordinate the SGR's activity.

  • A management team, composed of top managers, which represents the company's operational engine, selecting the options for the fund's investments and exits.

SGRs can manage private equity closed-ended funds set up by them or by other SGRs. If SGRs lack the capabilities to manage a business or investment internally, they can delegate the management of one or more stages of the investment activity to third party advisers but cannot avoid responsibility for the activities carried out by them. 

11. Are private equity funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?


Private equity funds are treated as common funds and, together with other forms of investment, are considered to be collective investment undertakings.

A public offering of private equity fund units requires prior approval by Consob and the publication of a prospectus. Certain exemptions may be available (see below, Exemptions).

An SGR can market the fund units directly, at its offices through distance marketing techniques or tied agents (promotori finanziari), or indirectly through one or more placement agents.


A public offering of private equity fund units does not require publication of a prospectus and prior approval by Consob if certain exceptions, including any of the following exemptions, apply:

  • An offer of units addressed to no more than 100 potential investors in Italy (other than qualified investors).

  • An offer addressed to qualified investors (see Question 12).

  • An offer of units totalling less than EUR5 million, calculated over a period of 12 months.

  • An offer involving securities for a total consideration of at least EUR100,000 per investor in each separate offer.

  • An offer involving open-end collective investment undertakings whose minimum subscription amount is at least EUR100,000.

12. Are there any restrictions on investors in private equity funds?

As a general rule, no nationality or number restrictions are imposed on investors in private equity funds.

Qualified investors must fall within one of the following categories:

  • Investment companies, banks, exchange agents, SGRs, SICAVs (that is, a common type of open-ended collective investment scheme), pension funds, insurance companies, finance companies that are parent companies of banking groups and other financial entities.

  • Authorised foreign entities that engage in the same investment activities as these.

  • Bank foundations.

  • Natural and legal persons and other entities with specific knowledge and experience in securities transactions.

13. Are there any statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in private equity funds?

There are no statutory limits on investment periods in private equity funds, except that the maximum duration of a common fund cannot exceed 50 years.

For some specific funds, investors may be required to subscribe for a minimum quota of EUR50,000 each.

For funds that are restricted to qualified investors, units can only be transferred to persons and entities included within specific categories (see Question 12).

The fund rules may contain other restrictions.


Investor protection

14. How is the relationship between the investor and the fund governed? What protections do investors in the fund typically seek?

The relationship between investors and the private equity fund is governed by the fund rules. Approval of the fund's rules by the Bank of Italy is not required for funds reserved to particular categories of investors or for speculative funds.

Typical protection terms that investors seek in the fund rules include:

  • Certain governance powers, such as the power to appoint the members of the fund's advisory committee, as these powers can express binding opinions on conflict of interest transactions and non-binding opinions on certain other matters.

  • The right to request, under certain circumstances, the suspension of the investment period or the early winding-up of the fund.

  • Information and reporting duties for the fund's managers.

Provisions regulating the meeting of participants of closed-end funds were issued in 2010. The rules of a closed end reserved to qualified investor fund can identify some issues which require authorisation by a resolution of the participants in a participants' meeting. In any case, a meeting of the participants must be called to vote on a replacement of the SGR, admission to listing (where this is not provided for) and changes to the investment policy.

It is common for a newly established fund to adopt rules aimed at facilitating fundraising on both domestic and international markets in line with international best practices.


Interests in portfolio companies

15. What forms of equity and debt interest are commonly taken by a private equity fund in a portfolio company? What are the relative advantages and disadvantages of each? Are there any restrictions on the issue or transfer of shares by law?

Common forms

In a typical buyout, a company is acquired by a specialised investment firm, the private equity fund, using equity and bank loans. Equity is provided by the private equity fund, the target company's management (either incumbent or new) and, occasionally, the seller.

A typical equity package comprises both true equity, in the form of ordinary shares or preference shares (whether convertible or not) or a combination of these, and quasi-equity, usually in the form of a subordinated shareholder loan or convertible bonds/warrants. Generally, management equity consists of ordinary shares only.

A preference share is a form of hybrid security. Preference shares differ from ordinary shares in that they generally have a preferential right to receive dividends and participate in any distribution on liquidation of the company. A convertible preference share, in addition to the traditional preference share rights, entitles the holder to convert it at some future point into another security, such as an ordinary share.

Investor loans are often used because of their tax advantages. Typically, they have a long maturity and interest payment is capitalised due to restrictions on dividends and other payments under the acquisition finance package. They are generally treated as if they were equity by acquisition finance providers because of these characteristics.

For an overview of the main forms of debt financing, see Question 23.

Advantages and disadvantages

See above, Common forms.


The issuance and transfer of shares in a company are not themselves subject to any legal restrictions. However, the company's bye-laws or the shareholders' agreement generally give restrictions on the transfer of shares, such as tag-along, drag-along rights and similar provisions, which entitle the private equity fund to force the other shareholders (and give them the right) to sell their shares on exit. The management team is typically prohibited from transferring their shares until exit and is subject to good and bad leaver provisions under their service agreements.



16. Is it common for buyouts of private companies to take place by auction? If so, which legislation and rules apply?

In the last few years, and particularly before the deterioration of market conditions, auctions have become fairly standard for buyouts of private companies. Although there are no specific laws or rules governing auctions, these procedures generally follow a specific path. First, a limited number of potential buyers are contacted by the seller's financial advisers. After signing a non-disclosure agreement, interested buyers receive an information memorandum with information on the target company and its business. Buyers are then invited to submit indicative, non-binding offers, following which a limited number of them are invited to conduct due diligence (with documents normally posted in a virtual or physical data room) and attend management presentations. Vendor due diligence reports are fairly standard. Generally, during this phase, buyers receive a first draft of the purchase agreement prepared by seller's counsel. At the end of this phase buyers submit their bid, together with a mark-up of the purchase agreement and other related documents. One buyer is then selected to conduct final negotiations with the seller and finally sign the definitive agreement.

Occasionally, businesses are sold in private transactions. This is much preferred by private equity houses because of the lack of competition and because of the higher level of information that they typically receive from sellers. Sellers have been willing to follow this path (instead of an auction) where there is a very committed buyer who could offer certainty of closing within a relatively short time frame.

17. Are buyouts of listed companies (public to private transactions) common? If so, which legislation and rules apply?

Public to private transactions are not uncommon but are more complex to execute compared to deals involving private companies.

Italian public to private transactions are regulated by the Consolidated Securities Act of 1998 and numerous Consob regulations. These transactions are generally structured as multi-step acquisitions in which the buyer:

  • First acquires all of the shares of the target company owned by one or more sellers owning a controlling block of shares.

  • Then commences a mandatory tender offer seeking to acquire all of the target company's outstanding voting shares.

To take the target company private, the offer is generally followed by a mandatory buyout of the remaining shares if the buyer is able to acquire 90% or more of the voting shares (and the subsequent exercise of a squeeze-out right over the minority shareholders of the target company if the buyer acquires 95% or more of the target shares).

Alternatively, assuming the buyer then holds a sufficient number of target company voting shares to approve it, the second end of the transaction can be structured as a forward merger of the target company with and into the buyer, with the latter remaining as the surviving entity. A merger triggers withdrawal rights for the target company's dissenting shareholders.

Principal documentation

18. What are the principal documents produced in a buyout?

The principal document between the seller and the buyer is typically the sale and purchase agreement. In a cross-border transaction the parties usually have a master purchase agreement and local transfer instruments that are designed to make the transfer effective in each local jurisdiction in accordance with applicable legal requirements.

The buyer and the incumbent management team, in connection with the funding of the acquisition entity, usually enter into investment agreements, shareholders' agreements and directorship/employment agreements. Depending on the structure of the financing, the buyer may also be required to grant the acquisition entity one or more loans in addition to equity capital contributions.

Private equity firms usually provide the seller with an equity commitment letter, under which the fund commits to provide the equity capital to the acquisition entity, subject to certain conditions in the acquisition agreement. It is not uncommon for the seller to seek the status of a third party beneficiary under the equity commitment letter, to have a right against the fund if the fund fails to provide the equity capital at closing. However, the parties enjoy broad powers to shape the rights of recourse against the fund in favour of the seller.

Bank financing is almost invariably present in any private equity transaction (see Question 23).

Buyer protection

19. What forms of contractual buyer protection do private equity funds commonly request from sellers and/or management? Are these contractual protections different for buyouts of listed companies (public-to-private transactions)?

In the highly competitive pre-financial crisis environment, the offering of very limited contractual protection to buyers was common. This required buyers to conduct deeper due diligence to compensate for low contractual protection, which often did not extend beyond:

  • Title and other very basic warranties.

  • Restrictive covenants to maintain the status of the target as of the reference accounts date by preventing cash leakage (such as a locked box mechanism).

In the current market environment, buyers are seeking more contractual protection, and are generally receiving a higher degree of protection than that received in the pre-financial crisis environment.

Payment mechanisms

Locked-box mechanisms involve both:

  • A fixed equity price for the target company agreed between the parties based on pre-signing accounts (generally audited).

  • A warranty from the seller (with corresponding indemnity) that the target company's value has not been reduced by any act of the seller after closing.

They are still widely used in secondary buyouts and are favoured by sellers as they provide price certainty.

An alternative to a locked-box mechanism is an estimated equity price and post-closing price adjustment. Typical price adjustment factors include net financial debt and working capital. This is generally used in a corporate carve out or similar transaction, in which stand-alone accounts are missing. Purchase price adjustment clauses are heavily negotiated between the parties.

Buyers can also use vendor financing and contingent purchase price payments (earn outs or similar mechanisms) to bridge the gap between the seller's price expectations and the buyer's available resources or business valuation.

Key contract terms relating to deal certainty, such as financing conditions and other customary conditions precedent, material adverse change provisions and reverse break-up fees, receive significant attention.

Representations and warranties

Buyers usually expect to receive a full range of representations and warranties covering all matters regarding the target company. However, in the secondary buyout market, private equity funds generally limit the representations and warranties they give to title and the seller's ability to complete the transaction. Similarly, in public to private transactions, bidders proceed with a transaction based only on due diligence without warranty or indemnity protection (other than those that may be given by controlling selling shareholders).

If sellers are not willing to give representations and warranties concerning the target business, buyers generally look for warranties from selling managers. Although these warranties have financial and practical limitations, they are generally sought to get disclosure of information.

The warrantor's liability for breach of warranties is usually subject to a number of limitations, which are usually heavily negotiated. Key limitations are:

  • A time limitation.

  • Financial limitations, such as:

    • an overall cap on the aggregate maximum liability;

    • a minimum level for individual claims; and

    • basket limits (a minimum amount of claims before liability attaches).

  • Whether the buyer has knowledge of the relevant matter.

  • Whether other sources of redress (that is, third-party claims or insurance) have been exhausted.

Specific known issues (including, for example, pre-closing tax or contingent environmental liabilities) are sometimes dealt with through specific indemnities.

Part of the consideration may be put in escrow to cover risks under warranty claims or other specific liabilities.

Other buyer protection

Other forms of buyer's protection include:

  • Bank guarantees.

  • An M&A insurance policy for the benefit of the acquirer.

  • Interim covenants, which limit the seller's actions between signing and closing without the buyer's consent. Key areas are the buyer's control over debt, working capital, capital expenditure, litigation, personnel and M&A transactions involving the target company.

These contractual protections normally do not apply in buyouts of listed companies. However, if there is a multi-step acquisition in which the buyer first acquires a controlling block of shares, some of the above contractual protections may apply (see Question 17).

20. What non-contractual duties do the portfolio company managers owe and to whom?

Managers of a portfolio company who take a position as director owe fiduciary duties to the company. In general terms, directors must act in the best interests of the company. The interests of the company are normally equated with the long-term interests of its shareholders.

While the law does not prohibit directors from being involved in or soliciting a management buy-out (MBO), they must act in good faith and in a manner that avoids conflicts of interests or misuse of fiduciary powers. Directors have a statutory duty to declare at a directors' meeting the nature of any interest that they may have in any contract, or proposed contract, with the company. If they are executive directors of an Italian joint stock company, they should even abstain from voting on the relevant matter. Directors must therefore inform the competent body of the company when they expect to approach potential investors in relation to an MBO.

21. What terms of employment are typically imposed on management by the private equity investor in an MBO?

Typical terms of employment in individual service contracts and the shareholders' agreement include:

  • Restrictive covenants (under which managers are prevented from taking various actions).

  • Non-compete obligations (under which managers assume obligations not to compete with its employer for a specified period of time).

  • Non-solicitation obligations (under which managers are prevented from soliciting another employee to leave the company and/or customers to do business with another company).

  • Confidentiality obligations (under which managers are prevented from using or disclosing any of the company's confidential information).

Managers are commonly incentivised in their capacity as shareholders (by good leaver or bad leaver provisions) or other employment instruments giving share options or other incentive securities. The bye-laws or the shareholders' agreement may give additional protection to the investor by:

  • Allowing the company to redeem management shares.

  • Granting to other shareholders an option to purchase management shares, when the holders leave the company.

  • Prohibiting transfer of management shares without the prior consent of the private equity investor.

22. What measures are commonly used to give a private equity fund a level of management control over the activities of the portfolio company? Are such protections more likely to be given in the shareholders' agreement or company governance documents?

A private equity fund controls the majority of the acquisition vehicle's equity in a typical single sponsor transaction. Therefore, private equity funds secure rights to nominate and elect directors and they do so with a view to protecting their interest in both the acquisition vehicle and the target company.

However, once appointed, the nominee is legally required to ignore the underlying rationale for the appointment and to promote the company's interests at the expense of those of the fund. The private equity fund can remove directors at any time, although if the removal is without cause, then directors are entitled to recover damages, which are usually determined as an amount equal to the remaining compensation that they would have received if they had held the office until its natural expiration.

It is common for the private equity fund and the other equity holders (including managers) to enter into a shareholders' agreement giving the fund a right to nominate a majority of the company's directors and appropriate voting provisions to ensure that the sponsor controls a board majority. If the sponsor invites minority investors to participate in the transaction, shareholders' agreements may offer the minority shareholders exit rights and veto rights over certain fundamental matters. However, the sponsor typically exerts control over exit transactions by reserving drag-along rights, rights to request an initial public offering (IPO) of the shares of the company and other similar rights.


Debt financing

23. What percentage of finance is typically provided by debt and what form does that debt financing usually take?

In general, 2011 also saw an increased use of leverage by private equity funds. The average net debt used to finance deals grew more than 50%, reaching EUR52.5 million, against EUR25 million in 2010. On average, in 2010, the net debt paid was 2.5 times the target's earnings before interest, tax, depreciation and amortisation (EBITDA), higher than the 2.2 multiple reached in 2010, but still below the pre-crisis value of 4.5 times EBITDA experienced in 2007. In addition, the debt-to-equity ratio in buyout measures 1:2 compared to 1:3 in 2010 and may further increase in the future depending on the economic downturn and on the forms of debt financing used in private equity.

In this respect, the principal form of debt finance continues to be senior debt, which is provided by banks and institutional lenders. Senior debt is generally guaranteed by all companies of the group (including the target company) and is secured over all of their assets, subject to certain limitations. Senior debt has a shorter maturity compared to the other debt finance and is typically amortising. The facilities generally provided in a senior finance package include a:

  • Term facility (used to fund the acquisition).

  • Capital expenditures facility.

  • Revolving credit facility (working capital facility).

The senior loan facility agreement typically contains detailed provisions designed to protect the lenders' investment (see Question 24, Contractual and structural mechanisms).

Junior debt is used, particularly in larger transactions, to increase the total amount of debt available and to bridge the gap with the equity package. Junior debt generally takes the form of:

  • Second lien debt.

  • Mezzanine debt.

  • Payment in kind (PIK) loans.

All junior debt ranks behind the senior debt in terms of priority of repayment.

The seller can also provide a source of finance, typically in the form of deferred consideration or an earn-out.

Typically, acquisition finance is funded by a bridge facility provided by the senior lenders, which is taken out sometime after the funding of the senior term facility following a merger of the target (which then becomes the borrower) or through a refinancing (debt pushdown). Most often, the senior debt is made available to the acquisition vehicle (in the form of a bridge loan) to finance the acquisition, and to the target company to refinance its existing debt and for working capital purposes.

Mezzanine debt ranks behind senior debt and, as a result, has a higher interest rate. Typically, there is just one borrower, the acquisition vehicle. It generally matures later than the last tranche of the senior debt and is repayable in one bullet instalment. The margin generally includes a PIK element in addition to a cash element. Financial covenants are present but typically contain more headroom. It is fairly common for warrants giving the right to subscribe for shares in the borrower at a predetermined price to be issued to the mezzanine lender as part of the package.

Law Decree no. 83/2012 introduced urgent measures for growth (Decree for Growth), as implemented into law by Law no. 134/2012 (Act of Conversion). It has introduced significant regulatory changes to expand opportunities for Italian non-listed companies to access the capital market. It removes fiscal and corporate limitations that penalised such companies in comparison to equivalent companies in other European countries. In particular, in relation to:

  • Abolishing the obligation of non-listed Italian companies to meet certain conditions to issue bonds.

  • The duration of, and conditions for the issue of, finance bills.

  • The tasks assigned to the sponsor.

The tax regime applicable to such securities has been aligned to the more favourable tax regime for securities issued by larger issuers (that is, banks and listed companies). In particular, in relation to the following:

  • Exemption from withholding tax.

  • Deductibility of interest expenses.

  • Deductibility of expenses of the issue.

  • Exemption from stamp duty.

The Act of Conversion confirms that the quantitative limits on the issue of bonds set out in the Civil Code should not apply to securities, to the extent that the bonds are intended to be traded on regulated markets or multilateral trading facilities, if certain conditions are met.

All historical data in this question is from Il mercato italiano del Private Equity e del Venture Capital nel 2010, published by the AIFI and from Private Equity Monitor Italia 2010, published by PEM Observatory.

Lender protection

24. What forms of protection do debt providers typically use to protect their investments?


Bridge acquisition facilities are usually secured by either or both of:

  • A pledge over the shares of the acquisition vehicle and the shares of the target group.

  • An assignment by way of security or a pledge of the receivables arising under the acquisition documents or under any shareholder loan documents.

Following the debt pushdown, the senior debt security package typically includes full asset security from each company in the target group (including the acquisition vehicle), sometimes subject to a materiality threshold. Although Legislative Decree no.142/2008 has introduced the possibility to give financial assistance (subject to certain limitations and compliance with certain requirements (see Question 25)), significant legal and tax constraints still apply to the giving of upstream or cross guarantees and related security.

Contractual and structural mechanisms

Typically, structural subordination is effected by using more than one special purpose vehicle.

The senior debt is typically at the top of the capital structure and is not subordinated to any other type of finance. The acquisition facility is first borrowed directly by the acquisition vehicle and then pushed down to the level of the target company after the acquisition. Other senior facilities are generally made available to the target company after the acquisition.

Typically, senior creditors are party to an inter-creditor agreement with the other finance providers. This agreement governs matters such as:

  • Subordination.

  • Permitted payments.

  • Acceleration and enforcement rights.

  • Incurrence of additional indebtedness.

  • Release of security and guarantees.

The senior loan facility agreement typically contains detailed provisions designed to protect the lenders' investment. These mechanisms are generally determined on a case-by-case basis but such provisions almost invariably include:

  • Voluntary and mandatory prepayments.

  • Extensive representations and warranties.

  • Information, business and financial covenants.

  • Events of default.

  • Milestones to be complied with to continue to use the financing.

  • Subordination of any other ways of financing to the senior loan.

Financial assistance

25. Are there rules preventing a company from giving financial assistance for the purpose of assisting a purchase of shares in the company? If so, how does this affect the ability of a target company in a buyout to give security to lenders? Are there exemptions and, if so, which are most commonly used in the context of private equity transactions?


The giving of financial assistance by a company, through either granting of loans or providing securities or guarantees, for the purposes of the acquisition or subscription of shares in itself is prohibited. In addition, a company is prevented from accepting its own shares as security or guarantee, even through a fiduciary or any other entity.


The Civil Code now permits the giving of financial assistance when it has been approved by special resolution of the extraordinary shareholders' meeting of the company. There are two limitations on this to protect the interests of creditors:

  • The assistance must be provided out of distributable profits and available reserves as reflected in the latest approved accounts.

  • There must be a statutory declaration of solvency by the directors of the company.

Other exemptions exist which are intended to allow companies to support employees' share schemes and other share acquisitions by employees.

In a leveraged buyout (LBO) before completion, the directors of the acquisition vehicle and target must consider the financial resources that are necessary to repay the debt incurred due to the acquisition, and there are specified procedural requirements for this. However, this does not exclude the financial assistance rules.

Insolvent liquidation

26. What is the order of priority on insolvent liquidation?

The order of priority on insolvent liquidation is regulated by the Bankruptcy Act. Creditors have priority over equity holders, which are regarded by law as residual claimants. This may apply to shareholders' loans, which may be subject to equitable subordination.

As a general principle, secured creditors holding valid fixed charges over specific assets of a company are satisfied to the exclusion of all other creditors, including secured creditors of a lower rank (for example, first degree mortgage over second degree mortgage).

Certain other creditors enjoy the status of preferred creditors (such as employees with outstanding wages). The Civil Code gives very detailed rules regulating priority conflicts between secured and preferred creditors.

Creditors can agree to contractual subordination by signing subordination or other inter-creditor agreements. Inter-creditor agreements also typically prohibit any payments to shareholders by way of dividends or through redemption of shares until full repayment of senior creditors.

Equity appreciation

27. Can a debt holder achieve equity appreciation through conversion features such as rights, warrants or options?

Debt holders can achieve equity appreciation through conversion features on terms which provide for the investor to be able to convert its debt security into a share in the borrower at a later date.

A debt instrument with an attached warrant is similar to a convertible bond. The warrant gives the holder the option to subscribe to shares. The debt-plus-warrant structure differs from convertible bonds in that exercise of the warrant does not bring the debt instrument to an end, whereas the debt instrument disappears when a conversion right is exercised.

The characteristic shared by convertible bonds and warrants, and which makes them both hybrid securities, is that they offer their holder the opportunity to participate in capital growth, thereby requiring the portfolio company to set aside a portion of its share capital to service such holders.

A debt holder can receive newly issued shares of the company in exchange for a waiver of its outstanding claim against the company, subject to passing a specific resolution of the extraordinary shareholders' meeting, and other procedural requirements. The terms of this transaction may be part of investment agreements and in many cases are conditional on various circumstances.


Portfolio company management

28. What management incentives are most commonly used to encourage portfolio company management to produce healthy income returns and facilitate a successful exit from a private equity transaction?

Common management incentives, which may be combined, include:

  • Compensation plan based on performance. Individual service agreements may provide for a variable compensation scheme based on the performance of either the portfolio company or the individual. Payments are usually related to key metrics reflecting the performance of the portfolio company, such as EBITDA, sales or net income. Compensation plans are allocated to have minimal effect on reported earnings. Payments are treated as employment income for tax purposes and are fully subject to personal income tax (at a maximum 43% rate) in the hands of the recipient. In some cases, a tax efficient structuring of such schemes may be based on the issuance of equity-like securities.

  • Stock options. Managers may be granted options structured as a right for an individual manager, or group, to buy shares of the portfolio company at a fixed or formula price (subject to adjustments) over a stated period of time. The option is usually issued by the company itself, to be satisfied by newly issued shares, but this is not necessarily the case.

    The use of stock options is less common than in other jurisdictions due to an unfavourable tax regime. There is no exemption from personal income tax on the increase in value between the grant and the exercise of the options. Under certain circumstances, some forms of phantom stock plans can prove to be more tax efficient.

  • Equity interests. Managers may be granted direct or indirect (strumenti finanziari partecipativi) equity participations in their portfolio company, which may enhance their attractiveness by issuing securities at a discount.

  • Golden parachutes. Employment contracts may provide for parachute payments to managers, contingent on a change in ownership or control of a portfolio company or its assets. Their value usually does not exceed the individual's average annual compensation for two fiscal years.

29. Are any tax reliefs or incentives available to portfolio company managers investing in their company?

With effect from the 2011 tax period, Italian companies and Italian permanent establishments of non-resident companies can deduct, up to the limit of their taxable income, a notional amount of the following qualifying equity increases:

  • Contributions in cash.

  • Undistributed profits.

  • A waiver of claims by shareholders.

For the tax years 2011 to 2013, the notional yield is equal to 3% of the equity increase. From 2014 onwards, the yield will be established by decree of the Ministry of Finance.

A notional amount that exceeds the taxable income of a certain tax period can be carried forward, without time limit, to subsequent tax periods.

30. Are there any restrictions on dividends, interest payments and other payments by a portfolio company to its investors?

There are no restrictions other than those provided for in the fund rules.


Exit strategies

31. What forms of exit are typically used to realise a private equity fund's investment in a successful company? What are the relative advantages and disadvantages of each?

Forms of exit

IPO, sale (trade sale or secondary buyout) and recapitalisations are all typical forms of a successful exit.

Advantages and disadvantages

IPO. Historically, the IPO has been a successful form of exit for private equity funds. The major benefit of an IPO is that the private equity fund does not need to subscribe to burdensome warranties or absorb price contingencies, which can happen in a trade sale. Other advantages can include a higher valuation (depending on the market), prestige and access to more capital and liquidity for the longer-term shareholders (including managers). The downside is that the process is longer, relatively costly and may not allow a full exit by the private equity house. The exit through an IPO is typically delayed by lock-up periods, usually ranging from six to 12 months.

Trade sale. Trade sales, either to a trade buyer or to another private equity house (usually with the management reinvesting), are generally structured as a sale of 100% of the shares of the acquisition holding company. Trade sales usually offer the advantages of deal speed and closing certainty while minimising continuing exposure to liability. Sales by private equity houses generally take the form of an auction.

Dual tracking. Sometimes, especially in the case of larger companies with well-recognised brands and strong management teams, private equity houses pursue an exit through an IPO in parallel with a trade sale until they choose which route will achieve the highest value.

Recapitalisations. Typically, in a leveraged recapitalisation the portfolio company borrows debt and uses the proceeds to pay a special dividend to the private equity house. Financial assistance issues need to be carefully addressed in this type of transaction (see Question 25).

32. What forms of exit are typically used to end the private equity fund's investment in an unsuccessful/distressed company? What are the relative advantages and disadvantages of each?

Private equity sponsors typically exit from an unsuccessful portfolio company due to financial distress, unless the management is willing to try to acquire the company and attempt a turnaround. Private equity sponsors usually enter into negotiations with financial investors specialising in turnaround situations and restructuring.

Some forms of pre-packaged bankruptcy have continued to remain attractive in 2011 because of the number of healthy companies that were unable to refinance pending debt maturities in what remains a closed debt market. Other techniques used by private equity funds to avoid the costs and value loss of bankruptcy are the restructuring plans provided for by the Bankruptcy Act and other forms of compositions with creditors.

*This chapter was written in collaboration with Massimo Antonini (Tax), Luca Bonetti (Banking) and Alessandro Portolano (Regulatory).


Private equity/venture capital association

Italian Private Equity and Venture Capital Association (Associazione Italiana del Private Equity e Venture Capital) (AIFI)


Status. AIFI is a non-governmental organisation and a non-profit association.

Membership. AIFI has 123 full members and 119 associate members.

Principal activities. AIFI's main activities are:

  • Supporting and facilitating the development of private equity and venture capital activity in Italy and abroad.

  • Representing its members.

  • Increasing awareness and understanding of the private equity and venture capital industry in Italy.

  • Conducting research and publishing reports and working papers.

  • Collecting and presenting information about the industry.

  • Organising educational programmes.

Online resources

Italian Tax Authority (Agenzia delle Entrate)

W (only in Italian)

Description. This is the official website of the Italian tax authority.

National Commission for Companies and the Stock Exchange (Commissione Nazionale per le Società e la Borsa) (CONSOB)


Description. This is the official website of CONSOB, the public authority responsible for regulating the Italian securities market. In the legal framework section, there is the updated text of Legislative Decree 58 of 24 February 1998 (Consolidated Law on Financial Intermediation), including an English version (only the Italian version is authentic).

National Central Bank: Italy


Description. This is the official website of the Bank of Italy. In the legal framework section, there is the text of Legislative Decree 385 of 1 September 1993 (Consolidated Law on Banking) but only in Italian.

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