PANNING FOR GOLD
VENTURE CAPITALISTS ARE LOOKING FOR THE NEXT ARMANI.

Byline: Cynthia Snow

Where is the next Gianni Versace? Draping fabric over a mannequin in some small southern Italian town? Or the new Giorgio Armani? Toiling away in a garret somewhere in…Milan with a great idea for a collection, but no cash? A new generation of venture capitalists is on the hunt.
Quietly and without much fanfare, a handful of banks and entrepreneurs are applying the Silicon Valley “garage start-up” investment formula to the little companies scattered across northern and central Italy. The idea is to find a cash-hungry start-up, nurture it with finance and business advice, and then cash in all or part of the chips via a private sale or public offering, and smile all the way to the bank. Others are taking equity stakes in more established brands, hoping to turn an underleveraged brand into the next Bulgari or Gucci.
Italy’s fashion industry, still only about 50 years old, really took root in the Seventies. So why is the gold rush only starting now? “Until five years ago, people were still talking about a country risk for Italy,” said Renato Preti, the former Morgan Grenfell Private Equity executive, who now manages Bulgari’s pioneering closed-end Opera fund. “The lira was very volatile. People didn’t look at Italy as a fertile ground for venture capital before the advent of the euro.”
A more stable Italian currency, as well as a few high-profile venture capital successes such as Ducati, Bulgari and Gucci, has whetted investors’ appetites for risks they once shunned, said Preti. Finally, the globalization of the fashion industry has simply forced Italy’s tiny mom-and-pop companies into the arms of financiers if they want to beat the competition.
“It’s a function of opening up the market,” said Preti.
Think of Helmut Lang: A decade ago, the designer might have been content to labor away in relative freedom and obscurity. In the competitive climate of the late Nineties, however, he needed to make a deal with a super-group like Prada in order to tap its financial muscle to expand worldwide.
Venture capital and private equity investors have always been scouring Italy to clinch that elusive deal; it’s just that these days, they are more aggressively on the lookout for fashion companies. The Benetton family’s private holding, 21 Investimenti; Bulgari’s Opera; NHS, the merchant bank unit of Italy’s banking heavyweight Sanpaolo IMI, and a few others are leading the way in this new wave.
The latest newcomer to the growing ranks of fashion venture capitalists is Gaetano Marzotto, of the Marzotto textile dynasty. Marzotto is heading up a new closed-end fund looking to invest in Italian fashion, design and “everything that’s good about Italy,” he said.
Don’t confuse these funds with brand-builders like LVMH, Prada and Gucci, even though they’re all chasing more or less the same companies on the market. When an LVMH or a Gucci acquires a new group, it’s for keeps, whereas private equity or venture capital investors always have what they call an “exit strategy,” a way to get their money back.
“The first stage of venture capital is general, and you have companies with a very wide-ranging portfolio,” said Andrea Ciccoli, a fashion and luxury goods consultant at Bain, Cuneo & Associati here. “Then people start to specialize a bit, and you get targeted funds, like Italy’s Pino Ventures [an early investor in Italy’s Internet star, Tiscali] and Bulgari’s Opera.”
Benetton’s 21 Investimenti is a good example of a “first generation” venture capital fund; it spreads out its investments in small companies across the board, including fashion. Indeed, it was an investor in the ill-fated Boo.com.
“Until recently in Italy, there was no real interaction between the industrial entrepreneur and the financial world. We saw an opportunity to create a dialog between the two,” said Alessandro Benetton, managing director of the company. “The bulk of Italy’s GDP comes from small-to-medium-sized firms, many of which get to a certain stage and eventually stop growing because they don’t have the resources. We wanted to take a different approach, give them advice, help them penetrate new markets and communicate their message in a new, modern way.”
Investors in the fashion sector, however, still have to prove themselves, said Bain’s Ciccoli. They’re busy trying.
Opera’s Preti said he was closing the fund’s second round of financing at the end of February, with 220 million to 250 million euros [or about $205 million to $233 million at current exchange rates]. However, Preti is still mum on which companies he has chosen to invest in, although at press time, an announcement was expected-by early March. Bulgari launched Opera last year to invest in midsized companies working their magic in Italy’s hottest sectors: fashion, interior design, food and luxury yacht design.
Preti is more forthcoming about the investors themselves, a Who’s Who of industry, including blue chips like U.S. telecom group Verizon and Japan’s Mitsui, as well as several of Europe’s top industrial families, like the Bertarellis (shareholders of Swiss biotech giant Serono) and the Goulandrises (owners of Rosenthal and Wedgwood).
Meanwhile, NHS, the merchant banking arm of Sanpaolo, is so pleased with the progress of its investment in Aeffe, the family-owned manufacturer that controls the Alberta Ferretti, Moschino and Rifat Ozbek brands, that executives there say the company is ready for a bourse listing by the end of this year. Aeffe used the $44.5 million it received from NHS — in return for a 20 percent stake — to acquire luxury shoe retailer Pollini, as well as the lingerie and swimwear maker Velmar.
“We can now think of the acquisitions cycle at Aeffe as over, and the company now makes everything from shoes to bathing costumes,” said Giuliano Mari, managing director of NHS. “Aeffe is now ready for a listing. We’re ready to take the first opportunity starting from the end of this year.”
Banks have traditionally been extremely unwilling to get involved in the fashion industry. The very thing that makes fashion interesting to people who love it — its ever-changing and ephemeral nature — is what makes bankers nervous.
Indeed, NHS’s other investments are in staid industrial groups like Fiat and Montedison. Mari said NHS and Aeffe have been working together for some time, and the bank became interested in becoming a shareholder because Aeffe had tangible assets that matched its intangible ones — creativity and flair.
“Aeffe has a strong production component, and our investment was also spurred by this,” said Mari. “It also has strong logistical operations as well as stores in prestigious locations like Via Montenapoleone in Milan, Via dei Condotti in Rome.”
But financial wizards who are hoping to discover a gem in the rough will need a lot of patience, industry observers say. The small size of most fashion companies means that it’s hard to get good managers to sign on. Once those managers join the company, they have to work with family members and employees who are used to “doing things the family way,” rather than by the book.
Then there is the issue of “the kids.”
“We speak to a lot of great entrepreneurs who say, ‘My kids won’t want to be involved in the business,’ but then when it comes down to it, they insist on keeping the younger generations in management, of giving them a majority stake,” said Opera’s Preti. “More so than in foreign companies, there’s a habit of trying to ‘get the kids set up.”‘
Along with patience, those financial gnomes interested in breaking into fashion should also understand that contacts are more important than a skill with a calculator. It’s all about contacts, contacts and more contacts, said Bain’s Ciccoli. “[Investors] need a network of relationships to be successful. You need a lot of insider knowledge, expert judgment. That’s more valuable than financial or technical skills.”