MILAN (Reuters Breakingviews) – When Cassa Depositi e Prestiti (CDP) was founded 170 years ago this week, Italy didn’t exist as a nation yet. The main task of the agency was to finance basic infrastructure such as roads and waterways for the King of Sardinia-Piedmont, Victor Emmanuel II, who later became Italy’s first king. Fast forward to 2020 and the once sleepy nation’s lender has turned itself into a nervous deal-making machine, leveraging 474 billion euros in total assets to build corporate champions in sectors ranging from telecommunications to financial technology.
Such activism has arguably a lot to do with the ambitions of its chief executive, Fabrizio Palermo, and to the desire of Prime Minister Giuseppe Conte’s government to reshape Italy’s industrial landscape. Since taking the top spot in 2018, former deputy general manager of shipbuilder Fincantieri and banker Morgan Stanley has worked to transform CDP’s mission. In just the last few months, the sovereign wealth fund has secured a deal to build a huge stake on the pan-European exchange Euronext, rising payments star Nexi and domestic developer Webuild.
Rome-based CDP is also working to combine the ruling Telecom Italia broadband network and the challenger to Open Fiber, both of which claim CDP as a shareholder. Responding to a government dictate following the fatal bridge collapse in 2018, the CDP is also vying to replace the humiliated Benetton dynasty’s control of domestic highway operator Autostrade per l’Italia. These endeavors are on top of pre-existing holdings in local heavyweights such as oil group Eni and mail-and-package player Poste Italiane.
“We decided to rationalize our portfolio but also to shore up the companies within it with a strategy of trying to create champions on the one hand and continue to develop infrastructure on the other,” Palermo told Breakingviews on the eve of the group’s 170th anniversary. CDP’s invested capital is “permanent, patient and dynamic,” he said.
This focus on infrastructure – albeit by an expanded definition – is at the root of CDP. The group, which is 83% owned by the Italian treasury with the remainder in the hands of a banking foundation, finances itself primarily through postal savings and bonds. This helped build Italy’s first telegraph network and its first highways; it still costs one day of schooling, said Palermo.
Today, however, the focus on equity investment is a priority. With an estimated 23 billion euros holdings in listed companies – or 5% of the June FTSE MIB blue-chip index – CDP is already Italy’s biggest stock picker. That compares to the French state’s investment in both listed and unlisted companies, at more than 100 billion euros at the end of June, according to data provided by the CDP. With its cheap funding providing a greater tolerance for lower returns than, say, private equity funds, CDP wants to become a bigger actor of the Italian economy, explained Palermo.
CDP arguably filled the void. Excluding state-backed groups, most of the listed Italian companies are dwarves compared to European or American rivals. Local entrepreneurs often do not have the capital or courage to increase the global scale through acquisitions. On the other hand, well-known brands such as Bulgari jewelery shop and tyremaker Pirelli have been caught by foreign predators. With Covid-19 likely to shrink Italy’s economy by about 10% this year, the need for cash will be even more acute, and the role of the state is expanding.
With a 10% average return on equity, CDP’s past track record looks impressive to country-related investors. But taking bigger stakes carries an element of risk. These funds, according to the law, are prohibited from investing in companies that are financially fragile. And the banking foundation can de facto veto the deal. But political pressure to shore up losing companies such as Alitalia airline has increased. Rome’s decision to create a 44 billion euro fund to inject capital into the Italian company, which will be managed by the CDP but remain separate from its accounts, has raised concerns that state money could be funneled to keep the politically connected zombie company alive.
Nonetheless, professional investors appear relatively comfortable with the CDP’s new role. The Blackstone and Macquarie purchase fund has joined forces with Palermo to possibly offer 9 billion euros for Autostrade per l’Italia. And Euronext’s € 4.3 billion in cash purchase of Borsa Italiana, which is supported by the CDP, is highly valued despite a potential conflict of interest in Rome wanting the offer to work. The Italian fund paid the market price when it agreed to inject 700 million euros into the exchange operator registered in Paris, along with Milan bank Intesa Sanpaolo. And while Euronext provided CDP board representatives in exchange for its support in the Borsa deal, CDP’s request to dominate the pan-European stock exchange headquarters in Italy was rejected, according to someone with direct knowledge of the deal.
Senior Italian and foreign executives who have dealt with CDP said that CDP is run professionally, with many financial executives from international banks such as Citigroup and Deutsche Bank. They also note that Palermo is highly skilled at cultivating political support, particularly of the 5 Star Movement, an anti-establishment but pro-state party that is the government’s largest coalition partner. Such a relationship is sure to raise questions about Palermo’s ability to withstand political interference when choosing investments or choosing company directors.
It’s up to Palermo, 49, to allay those concerns if he gets Roma’s backing for another three-year term next year. Board reforms at state-backed companies including Telecom Italia and Eni, and institutions such as CDP, sparked an intense political horse trade. Palermo, however, is clear about wanting to stay: “In my career I haven’t changed many jobs,” he said. “I hope I can stay here for a long time because this institution can do a lot for the country.”
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