Italian investment bank Equita has recently expanded its asset management operations with the launch of Equita Capital SGR, an investment boutique focused on alternative solutions for institutional investors.
Equita Capital SGR got Bank of Italy's authorisation to start operating as an asset manager in the country on 23 July, and unlike most new managers, its business kicked off with over €1bn in assets under management. An amount coming from Equita'sdiscretionary accounts managed on behalf of the Credem Group, two flexible funds, and Equita Private Debt Fund which, unveiled in 2016, is one of the first private debt funds launched in the Italian market.
According to the new manager's chief executive officer (CEO), also responsible for the firm's liquid strategies, Matteo Ghilotti, this starting point "puts Equita Capital SGR above the breakeven point from day one."
Banks and asset managers with retail distribution will soon have to drive customers to gradually increase their risk profile to aim for higher returns, which can be achieved by patiently investing in illiquid assets."
The company's business split is 60% in flexible funds, 25% in equities, and 15% in private debt and credit strategies. Ghilotti says:"We do not want to offer plain vanilla equity or fixed income funds where competition is already very fierce.
"We focus instead on flexible and private debt funds."
Within the flexible funds offering, Equita Capital offers its clients two strategies: the Euromobiliare Equity Mid Small Cap, whose AUM amount to €392m, and the Euromobiliare Equity Mid Small Cap, with €229m of AUM.
By their part, the discretionary accounts managed on behalf of the Italian Credem Group account for around €250m of the manager's total assets while the 2016's private debt strategy manages some €100m. The remaining €52m are represented by the Blueglen Equita Total Return fund, a credit strategy investing across Europe, managed by the London-based boutique Blueglen Investment Partners and of which Equita is the exclusive distributor in Italy.
As per the firm's commitments towards ESG, Ghilotti said that sustainability has been a crucial element in the guidance of the Equita Group's business strategy and activities, and a key aspect to create long-term value for both the company and its clients. As part of its efforts towards responsible and sustainable investment, the new manager has partnered with the Graduate School Business and Society of Università Cattolica del Sacro Cuore (ALTIS) to conduct a research into corporate sustainability focusing on Italian small and medium enterprises (SMEs).
The research's goal was to study how ESG ratings methodologies could be improved (including methodologies of external rating providers), also to encourage SMEs to improve their own ESG assessments.
"The results of the analysis, presented at the beginning of September this year at the Università Cattolica in Milan, are contributing to define some of the advised ESG practices for SMEs as well as helping investors to better analyse these companies according to ESG criteria."
Ghilotti also added that ESG principles will become increasingly important in the firm's investment decisions, both at its portfolio management and at its private debt and private equity teams.
In the short-term, Equita Capital is launching a second private debt fund, set to be officially unveiled and commercially promoted by the end of the current year.
According to the firm, the fund launch could lead the manager to expand its client base abroad. Ghilotti says: "Thanks to the strong track record of our first private debt fund, we are confident to expand our investor base and include some of the leading European institutional investors in the asset class."
And continuing with its growth plans in the private sector, the manager has announced it will be promoting some new initiatives within the private equity domain, seeking to take advantage from the favourable legal and economic framework that is being created in Italy lately, which has resulted from the introduction of tax incentives for new investment structures like the European Long-Term Investment Funds (ELTIFs).
The new tax incentives decree implies that ELTIFs which mainly invest in Italian assets should be granted tax exemption following certain prescriptions.
Ghilotti explains: "Banks and asset managers with retail distribution will soon have to drive customers to gradually increase their risk profile to aim for higher returns, which can be achieved by patiently investing in illiquid assets.
"Such a kind of investment should be done only through closed funds to avoid the crisis generated by mixing open funds (exposed to outflows) with assets that have liquidity temporary restrictions. The ELTIFs are long-term closed funds that have been specifically designed for distribution to retail investors (because of specific protections in terms of portfolio diversification).
"We want to take advantage of such convergence of elements by promoting ELTIF investing in illiquid or almost illiquid assets (private equity deals and/or small cap and micro-cap). Also, in this case we will serve the banking partners without directly addressing the retail investors. We could start from private equity and small/micro-cap funds to exploit our team's competences and culture. By aggregating external skills we could consider a more articulated and differentiated strategy."
The company also said it would be launching initiatives paying special attention to ESG factors, as well as to yield attractive returns for investors, and positively impact the invested companies (helping for instance entrepreneurs to finance their businesses).
In the short-term, Equita Capital rules out an expansion to any new market unless some opportunity to partner with another boutique arises. With regards to the launch of new investment strategies, the manager left an open door and said it would depend on whether they were able "to find the right people, with a specific know-how and possibly with some anchor investors."
In order to deepen its presence in Italy, the firm wants to position itself as the key independent partner for banks to study and offer tailored solutions aimed at satisfying their retail clients' needs with niche products.
As a manager of discretionary accounts since 2003, the Equita Group has always followed an investment philosophy focused on concentrated portfolios, where bets on sectors and stock picking are based on fundamental analysis and the ongoing dialogue between portfolio companies and analysts of the company's research team.
Ghilotti outlines: "We also embed our bottom up research in the broader contest of the macro analysis, in order to avoid missing the forest for the trees.
"When we have bold investing ideas, we are ready to go against the consensus and give detailed explanations to our investors."
Focus on small and mid-caps is key for the firm as it represents its most significant area in terms of assets under management. Around €130m are invested in or dedicated to small and medium companies that have a strong track record in terms of returns over time (+13.6% average gross annual return over the last ten years).
FOCUS ON ALTERNATIVES
Equita Capital believes that private debt of Italian SMEs is an extremely attractive area of investment because these companies are very lean, flexible and export-oriented. In its own words, it is a market segment that is less competitive and therefore, has more appealing returns.
With regards to alternative credit assets, Ghilotti says they could help investors to reduce risk as there is less downside and price volatility compared to public credit, which is more crowded "because by definition, it is easier to invest in it. "
He continues: "In private markets, instead, both the investment process and the track record of the team are crucial to make a good capital allocation. I think we have both, and the first fund is an evidence of that."
The firm's expertise on the private equity space is not new. It was a pioneer in the sector when it launched its Equita Private Debt Fund in 2016, raising €100m from a group of institutional investors including banks, insurance companies and family offices.
Ghilotti says: "Over the past three years, the team in charge of the Fund has been able to identify several interesting investment opportunities and, by partnering with top Italian and foreign private equity funds, the company has been able to build a portfolio that as of today records gross returns of above 9%, despite its limited risk profile."
Looking at the remainder of the year, the manager also favours private debt In terms of risk/return.
Ghilotti comments: "We favour private debt for sure because we focus on high quality, reasonably leveraged smaller companies where we can get 8-9% gross returns with a manageable risk.
"I am also convinced that in equity markets the current situation requires a certain dose of caution and this is the reason why our flexible funds have a conservative asset allocation, which limits the upside but gives us plenty of optionality."