To most people, lending money to small Italian businesses looks perilous. In the past decade, Italy became a byword for financial dysfunction as hundreds of billions of euros in bad loans piled up, its third-biggest bank cratered, and a moribund economy triggered a wave of political populism. Who wants to provide credit in such a stormy market? Bob Diamond, the former chief executive officer of Barclays Plc, for one.
This month, Diamond’s private equity firm, Atlas Merchant Capital, stepped up as the top investor in a €600 million ($736 million) investment vehicle led by Corrado Passera, the former head of Intesa Sanpaolo SpA, Italy’s second-biggest lender by assets. Called Spaxs, the venture plans to buy an Italian bank and originate loans for small and midsize companies.
Never mind that Italy may be on the cusp of yet another bout of turmoil. A center-right coalition backed by Silvio Berlusconi, the scandal-tarred former prime minister, and the anti-establishment Five Star Movement, which once called for a referendum on abandoning the euro but now calls that “a last resort,” are both doing well in the polls ahead of the March 4 contest. For Diamond, an American investment banker who was ousted from Barclays in 2012 in connection with the Libor rate-rigging scandal, the vicissitudes of Italian politics are no cause for alarm. “That’s not something we worry about,” says Diamond. “The political situation is very well-known. What we are finding is that regulators and political leaders believe there isn’t enough credit provided to small businesses. We see great opportunities for high-quality lending to strong companies.”
It’s true that companies in Italy have been steadily getting back to health. Nonperforming loans among companies with no more than a small handful of employees dropped 19 percent from the third quarter of 2015 to the third quarter of 2017, to €19.3 billion, according to data from the Bank of Italy. After years of stagnation, the Italian economy is finally showing some pep, with Bloomberg Economics forecasting that gross domestic product will grow 1.3 percent this year. “The worst is over, and the recovery is gaining momentum,” says Mario Spreafico, the chief investment officer at Banca Leonardo SpA. “Lending to Italian small companies may be a winning choice at this time.”
Although Italian banks have been stabilizing—with some help from the state, which last year salvaged Tuscany’s Banca Monte dei Paschi di Siena SpA—small, family-run enterprises still struggle to get enough credit. Such companies account for more than half the nation’s exports. “Lending to small businesses is really crippled,” says Beat Wittmann, the chairman and partner of Porta Advisors Ltd., a Zurich-based investment banking boutique. “The big banks that should do this are incapacitated, especially in Italy, so access to capital for small businesses has been virtually impossible.”
That’s why Diamond believes this is the moment to get behind that most basic of financial products—the bank loan. This marks a departure for a man who made his name turning Barclays’s investment bank into a global force from 2005 to 2011. That track record couldn’t save him when regulators on both sides of the Atlantic fined Britain’s second-biggest bank $451 million in June 2012 for manipulating Libor, the benchmark used to set interest rates on loans, mortgages, and other fixed-income instruments. While Diamond wasn’t implicated in wrongdoing, market-rigging practices were an open secret on Barclays’s trading floor, according to the U.S. Commodity Futures Trading Commission. British tabloids cast Diamond as a symbol of the aggressive banking that led to the crash of 2008. He resigned a week after the settlement, following intense pressure from U.K. lawmakers.
Diamond returned to the fray in 2013 as the co-founder of Atlas Mara Ltd., a company based in the British Virgin Islands that bought stakes in African banks with an eye toward profiting from rising demand for credit on the continent. After holding an initial public offering on the London Stock Exchange that year, Atlas Mara found it rough going as the slide in commodities slowed African economies, and working out souring loans at lenders in Nigeria and Zimbabwe proved daunting. Atlas Mara’s shares have skidded more than 70 percent since December 2013. Yet its fortunes may be stabilizing: The company’s net profits almost quadrupled in the first nine months of 2017, to $15.8 million, compared with the same period in 2016.
Despite the turbulence, Diamond is now extending his reach across the Mediterranean. Last year, Atlas Merchant snapped up a consumer finance company in Greece called Credicom. On Feb. 1, Spaxs, a special-purpose acquisition company, or SPAC, conducted an IPO on the alternative investment exchange at the Borsa Italiana in Milan. Atlas Merchant bought a 7.7 percent stake in the venture.
In Spaxs, Diamond is joining forces with Passera, an influential player in both finance and government. As the CEO of Intesa from 2002 to 2011, Passera executed a series of acquisitions, culminating with the €27 billion purchase of Sanpaolo IMI SpA in 2007. Since then, Intesa Sanpaolo has leapfrogged UniCredit to become Italy’s most valuable bank, with a market value of about €52 billion. A cerebral financier with a taste for policy, Passera served as the minister for economic development in Mario Monti’s government after leaving Intesa Sanpaolo. He championed reforms to make it easier for startups to obtain financing.
Now, with Diamond’s help, he plans to make good on his efforts. Spaxs plans to spend up to 10 percent of its capital to buy a lender and obtain its license and invest the rest in developing the company’s technology, staff, and business operations. The firm is evaluating five candidates and will release a business plan after the purchase is completed.
The bank will originate loans, help borrowers restructure their organizations to make them creditworthy, and purchase bad debt on the cheap to squeeze value from whatever collateral or payments it can recover. “There are thousands of good entrepreneurs whose businesses can grow and others who are able to overcome obstacles,” Passera said in a presentation to investors on Feb. 1. Small-business owners hope Spaxs is one of many alternatives to traditional banks that will take root. “Our companies not only need fresh finance but innovative and flexible ideas for supporting their development,” says Alfredo Mariotti, general director of Ucimu, a lobbying group for machine tool outfits and automation providers.
Navigating the idiosyncrasies of Italy’s business culture won’t be easy, says Nicolas Veron, a senior fellow at Bruegel, an economics think tank based in Brussels. Italy has the second-highest rate of self-employed citizens in the European Union, according to the Organization for Economic Cooperation and Development. Yet the nation has a weak system for enforcing credit agreements, and entrepreneurs often use personal property as collateral for business loans, which makes working out failing debts difficult, Veron says. “There is this fuzzy boundary between the corporate and the personal,” Veron says.
While there’s a clear need for a new type of lender to fill the gap left by traditional banks, it’s unclear whether Spaxs and other challengers will originate a significant volume of new credit or resort to buying and working out existing bad debt, says Wittmann. That’s a crucial question as Italian companies look to take advantage of the economy’s rising fortunes. “Lending will probably be slow and small,” Wittmann says. “This is still more about potential than reality.”