Time to play

He may have spent 15 years as an investment banker at Morgan Stanley but Claudio Sposito, now chairman and chief executive of Milanbased private equity firm Clessidra, is probably no fan of “masters of the universe”. On the other hand, he is greatly enthused by the “invincible lords of nature” – otherwise known as Gormiti.

To explain: Gormiti are collectable toy figures whose right sare owned by Clessidra portfolio company Giochi Preziosi, Italy's largest toy maker, while the “masters of the universe” – a phrase sometimes used to describe gods of the financial world – is also the name given to a media franchise created by rival toy firm Mattel. Sposito is confident that the grisly-looking Gormiti can justify their “invincible” tag by defying the economic headwinds. “They're quite recessionproof,” he says. “We are confident that people will still buy toys, even in this environment.”

Sposito is seated opposite me in the boardroom of his firm's inconspicuous office in Via del Lauro, a narrow, winding street that's also surprisingly quiet given its central location just a short distance from Milan's world-famous La Scala opera house. When Clessidra was launched in 2003, the tranquillity of the surroundings may have come as a relief to Sposito given the relentless media noise associated with his prior role as chief executive of Fininvest, Italian Prime Minister Silvio Berlusconi's holding company, which Berlusconi founded in the 1960s.

Reflecting on the four years he spent at the industrial giant, from 1998 to 2002, Sposito describes the role as having been “very active and visible”. This may be code for “controversial”. Those four years saw a lot of restructuring within Fininvest's portfolio. In Sposito's own words: “We refocused the group and that meant some significant restructuring and several divestitures.” As part of a strategy to focus Fininvest on its core entertainment and media interests such as television network Mediaset and football club AC Milan [Sposito, incidentally, is a “big supporter” of rival AS Roma], the likes of department store chain Standa and real estate group Edilnord were sold off during Sposito's spell in charge.

Sposito reflects that by the time he left Fininvest he had added operational accomplishments to the financial wizardry he had honed at Morgan Stanley. “There's a big difference going from being an adviser to being a principal,” he says, comparing the two roles. “I developed technical skills at Morgan Stanley but at Fininvest I had more independence when it came to decision making and I had more responsibilities. I was involved in some very active portfolio management.”

It was in 2003 that Sposito set out to apply his experience to the private equity world. He recalls: “I thought the Italian [private equity] market was not fully developed and that there was room for a different player – an entity that would be very Italian in its approach and mentality but with the capacity and the capability to execute larger deals. Such a player would be institutional, like a global private equity firm, but with a country focus.”

ALL IN A NAME
Clessidra , which means “hourglass” in Italian, was formed in February 2003. Asked about the origins of the name, Sposito says he wanted to avoid resorting to an acronym and consulted a friend and business adviser with a marketing background to devise something more compelling. The hourglass, says Sposito, represents “human creativity, time and value”. It is clear that the concept has now been embraced fully as hourglasses seem to adorn every nook and cranny at Clessidra HQ, from the small and delicate to the large and imposing.

I developed technical skills in investment banking but at Fininvest I had more independence when it came to decision making and I had more responsibilities

However, the name was probably not the most important step in building a credible private equity firm. More crucial was how Sposito went about demonstrating his firm's local credentials. It was helped by having a strong team of Italian professionals. Sposito brought with him three men he had worked with both at Morgan Stanley and then on the Fininvest restructuring – Alessandro Grimaldi, Manuel Catalano and Matteo Ricatti. They were supplemented by Giuseppe Turri and Alessandro Papetti, formerly chief executive and partner respectively at Italian private equity firm Arca Impresa Gestioni.

A less newsworthy development but one which Sposito believes was also highly significant was registering Clessidra with the Bank of Italy as a joint stock company known as an S.p.A (Società per Azioni). This was something which few private equity funds had done in Italy at the time because it was a more complicated structure than those normally used and required a higher level of transparency towards the Italian regulators.

Sposito's positioning of Clessidra faced its acid test when it went out to raise its first fund. Vindication came in January 2005, when its €820 million final close made it the largest Italy-focused fund that had been raised at that date. Local support was forthcoming, with €500 million being committed by Italian institutions. These included Italian banks such as Mediobanca, Unicredit and Intesa Sao Paolo. “We were perceived as part of the Italian financial establishment,” says Sposito, “in a country where, at the time, private equity was seen as a marginal phenomenon.”

And, no, Berlusconi was (and is) not an investor in Clessidra – either as an LP or in the management company. Asked the question, Sposito replies that the firm is a totally independent management company owned by the nine partners.

He says the first fund was “never going to be easy to raise, especially outside Italy”. This seems modest, however. After all, some €300 million was raised from an impressive line-up of international LPs including the California Public Employees Retirement System (Calpers) and the New York State Common Retirement Fund. Calpers, which committed €50 million to Clessidra's first fund, revealed in minutes of its October 2008 investment committee meeting that it would be re-upping to the tune of €150 million in the second fund (of which more later).

HUGE ECONOMY
Sposito says there were a couple of basic but important messages to convey to waver ing over seas investors about the Italian market. First: the size of the opportunity. It can be too easily forgotten, Sposito contends, that Italy has a huge economy comparable in size to those of the UK and France. Second, Italian companies are “mentally inclined to growth”. In a country with a vast swathe of medium-sized, often familyowned, companies with big ambitions, the opportunity for “buy-andbuild” strategies is compelling.

We were perceived as part of the Italian financial establishment in a country where, at the time, private equity was seen as a marginal phenomenon

As an example of a company Clessidra has helped to grow, Sposito points to Moby, a shipping company operating ferries between the Italian mainland and the islands of Elba, Sardinia and Corsica. Under Clessidra's ownership the firm has acquired two ferries and a competitor on the Sardinian route, Lloyd Sardegna, for a reported €50 million – bringing another five ferries into Moby's ownership in the process. It now has a fleet of 21 boats in total.

But while Moby was arguably a straightforward growth opportunity – in concept if not necessarily in execution – the Clessidra team has sought to apply creative imagination to other opportunities. In the case of gas transportation business Società Gasdotti Italia (SGI), this involved creating a whole new company.

Sposito says of the deal, which was struck in 2004: “SGI was a division within [the Italian power company] Edison that we turned into Italy's first independent gas transmission business, totally focused on the open market opportunities.”

The deal evidenced Sposito's theory that there was an opportunity to develop nascent infrastructure projects to the point where specialist infrastructure funds would become interested. “We like infrastructure deals where there remains a lot of work to do to get to the point where there is a level of managerial transparency and operational efficiency needed for infrastructure funds to invest. This ensures that we create the appropriate value added for our LPs,” he says. In the case of SGI, that's precisely what happened: ABN AMRO Global Infrastructure was persuaded to part with €300 million for the business in January 2007.

The deals mentioned above are all examples of Clessidra taking sound businesses and then applying innovation to grow them further. Nor is this a coincidence: Sposito is quite clear that, in spite of past experience, restructuring is not his favoured strategy today. He says: “We will look selectively at restructuring angles but we believe that the market disruptions favour strong companies in consolidating their leadership position and that's why, first and foremost, we seek to identify consolidators.”

Talk of growth may be hard to reconcile with the Bank of Italy's recent forecast that the Italian economy will shrink by 2 percent in 2009. But Sposito does not believe that conditions are particularly adverse. “The financial system in Italy is relatively well positioned as the banks were less aggressive during the boom and there has been no major disruption in the Italian banking system on the scale that we have seen elsewhere. In addition, Italian families have a very low level of indebtedness. They are high net savers, so the impact will be less on consumer spending.”

Optimism appears to be one of Sposito's personal traits. “I do not believe the world is coming to an end,” he says with a reassuring smile. “In the next two years there will be attractive opportunities for private equity. It's a world with less debt, but you still get to look at some very credible opportunities.”

On the subject of debt, he says it is possible to get €200 million to €300 million in today's environment rather than the €2 billion to €3 billion of the recent past. “Banking based on relationships is very important,” he adds, “because they [the banks] come to know client companies inside out.”

SUCCESSFUL TIE-UPS
Sposito claims that the decline in the debt market has not been much of a hindrance to his firm, pointing out that the last two deals it has completed – one of which was the pre-Christmas buyout of business information provider Cerved alongside US private equity firm Bain Capital – featured a 50/50 debt to equity ratio. Incidentally, the tieup with Bain was cited by one local Milan-based professional as evidence of how Sposito “successfully leverages his contacts”. The firm appears happy to invest alongside partners in deals where appropriate.

There has been much recent speculation about which GPs would suffer most from any industry shakeout. Sposito believes that Clessidra is well positioned as a country-focused fund. “Local players will do better,” he says. “The idea of the pan-European fund is very complex to execute successfully because the individual markets within Europe are so different. For LPs, a mixture of global funds and key country players is probably a good strategy.”

Furthermore, Sposito openly admits that he wants Clessidra to be viewed as the number one fund in Italy. Whether that ends up being the case or not, the firm certainly appears to be winning the support of investors. At the time of writing, market sources report that it has so far gathered between €1.3 billion to €1.4 billion for its second fund, which has a target of €1.5 billion. This may have something to do with figures from the Washington State Investment Board showing that Clessidra's debut fund was registering an IRR in excess of 100 percent on June 30 2008.

As I get up to leave, I'm invited to peruse a collection of Gormiti warriors gathered together in a small, warriorlike huddle. It's hard not to be a little unsettled by their ugliness and apparent ferocity. Sposito reflects that the designer who created them was greeted with scepticism by his bosses when he claimed that one day they would sell by the million. He turned out to be right, says a smiling Sposito, as we head off to turn our attention to a rather more aesthetically-pleasing object: the largest hourglass on the premises.

CLESSIDRA AT A GLANCE
Founded: 2003

Senior professionals include: Claudio Sposito (chairman and chief executive); Alessandro Grimaldi (senior partner); Giuseppe Turri (senior partner); Maurizio Bottinelli (partner); Manuel Catalano (partner); Alessandro Papetti (partner); Matteo Ricatti (partner); Ugo Belardi (partner and chief operating officer)

Investment targets: Corporate restructuring; privatisation; family-owned business; buy-and-build; going-private

Portfolio includes: Giochi Preziosi (toys); Global Wood Holding (renewable energy); Metalcam (steel components); Moby (ferry transportation)

Source: www.clessidrasgr.it