Recent developments in the M&A turnaround market

The global Covid-19 pandemic suddenly caused various structural changes which impacted the entire global economic and competitive market, redesigning supply chains, changing the relationships between businesses and employees and, most importantly, overturning the businesses’ approach to the market and clients.

All this obviously had a major impact on the cash flow dynamics of all companies, most of which found themselves dealing with one of the severest financial downturns ever and, moreover, in need to prioritise cash management over the management of operations. In a situation of distressed financial position, the ability to transform and adapt quickly to new conditions will be a key feature of businesses which intend to manage the crisis rather than suffering from it.

There emerges the vital role of turnaround strategies, also through M&A operations, a tool increasingly crucial to face change and make businesses more resilient to the new context.

As far as the current domestic situation is concerned, according to a report by AIFI (i.e. the Italian association of private equity, venture capital and private debt) with the support of Back to Profit, in 2021 there were an estimated 1,700 potentially distressed businesses, corresponding to an aggregate turnover of 55 billion Euro and approx. 170,000 employees. These include businesses of various sizes which, despite their good operating performance (positive EBITDA), are beginning to suffer from an increasingly challenging indebtedness.

In these situations, timing is key and the possibility to successfully relaunch a business in a quick and effective way increasingly requires the involvement of specialised professionals who, besides having considerable capital, can also contribute standing, know-how and commercial networking capabilities. The presence of these players in Italy is growing, though still quite limited, partly due to the rigid legal and regulatory systems, still very complex, subject to interpretations and slow.

At the peak of the pandemic, i.e. throughout 2022, the turnaround segment maintained a niche position, with only 9 operations promoted by financial institutions for a value of 172 million Euro, compared to the 7 operations for a value of 96 million Euro in 2019, with a marked 80% increase on the previous FY. The average amount invested in turnaround deals in 2020 amounted to approx. 19.1 million Euro.

According to the AIFI report on the Italian private equity market, there were 6 investment operations promoted by turnaround investors in Q1 2021, for a total amount of 27 million Euro, with a significant increase compared to the same period of 2020, when only 1 turnaround operation was completed, for 1 million Euro.

These data are highly significant if we keep into account the interruption of operations following the lockdown in the first half of 2020 and the subsequent disruption experienced by many businesses in the first half of 2021.

It is clear that an increase in the number of financially distressed businesses led to a parallel increase of M&A turnaround opportunities, thus considerably widening the market segment of a sector almost unknown so far.

In the next few years, this type of operations will become a financial strategy aimed at turning businesses around, relaunching their operations in difficult phases of their lifecycle.

This will also be thanks to the new measures implemented by the government in the last few months to support businesses during the emergency phase and thanks to the new ways in which institutional investors can now support the Italian entrepreneurial fabric.