Home / OPINION / Analysis / The Italian Strategic Fund -CDP Equity: Structure and Future

The Italian Strategic Fund -CDP Equity: Structure and Future

Print Friendly, PDF & Email

GIANCARLO ELIA VALORI

The “Italian Strategic Fund” (FSI) was established on July 28, 2011, with the then Economy Minister, Giulio Tremonti, and with the collaboration of the Treasury Director General, Vittorio Grilli, under the chairmanship of Cassa Depositi e Prestiti (CDP), led at the time by Franco Bassanini, as well as with the support of CDP’s CEO, Giovanni GornoTempini.

From the outset, like many but not all the several Strategic Funds existing in the world, the FSI has been a holding company with the primary aim of supporting strategic Italian companies.

Strategic companies in terms of products, important for processes, decisive for technologies, essential for Italy’s cutting-edge technologies, like the Defence companies.

In this case, what does it really mean to be a “strategic company”?

The various schools of thought diverge on this point, but we could find a good definition by recalling that strategic companies are those essential for the medium-long term planning of the major and most promising sector of Italy’s industrial system.

The idea of the FSI was also to favour the maximum efficiency of some companies and, in particular, to stimulate the enhancement  of their ability to “compete” at international level.

Initially, the FSI share capital was ridiculously low, i.e. one billion Euros, which rose almost immediately to 4 billion Euros.

However, in the initial projects and still today, the company’s endowment could have reached 7 billion Euros. Probably still too little.

Like all the similar funds currently operating in the world today, the Italian Strategic Fund is targeted to sound companies which, however, need a new capital injection.

Certainly, unlike before the great technological revolution of the Web and of logistic telecommunications, it is currently hard to speak about “national champions” as we had at the time of Renault or Fiat or, possibly, Autostrade.

Nowadays, with the Global Value Chains (GVCs), it is even hard to identify the direct nationality of products that we all consider characteristic and typical of a given nation.

With a view to understanding GVCs, we need to think above all about the geographical distribution of companies. All small and medium-sized enterprises. The other less known side of Schumacher’s “small is beautiful”.

In the classic model of “delayed development”, which was generally accepted until the 1970s, the shift of the global production centre from the EU and the USA to Asia was interpreted only as the creation of a structural dependence of the non-Western peripheries on the Eurasian production centre.

The Marxist derivation of this model was Arghiri Emmanuel’s brilliant theory of unequal exchange, also developed in the early 1960s.

That was the origin of the theory of the world division between “rich” and “poor” countries. Currently, however, with the evident presence of world overproduction (and of financial securities to cover it) at the origin of the present economic crisis, since 2016there has been a tendency to think, instead, that there is an even more heuristic model, called “compressed development”.

Compressed development would be a criterion that puts at the centre of its interest the heterogeneity of the individual countries participating in the Global Value Chains, thus also taking into account the extraordinary difference in power of the large multinational companies compared to the infinite “peripheral” and often non-Western SMEs.

Hence the SMEs as essential factors of the new international division of labour, but depending on a higher system of GVC managers that is a cartel in individual sectors and a political and industrial agreement between different sectors.

Hence, while it is true that the highest value-added segments tend to still remain in the old Euro-American centre – although China is currently showing us a different strategy – it is equally true that a model explaining Global Value Chains with the old criterion of “comparative advantages” and asymmetry between centre and periphery no longer stands the test of time.

Hence what is the national economic interest? It is currently hard to answer this question.

We are partially helped by Hecksler-Ohlin’s theory stating that a “nation mainly exports goods requiring factors of production it has in abundance (labour, specialized technology, capital) and that it can most efficiently and plentifully produce”.

Therefore, the share of comparative advantages stems from the composition of its primary production formula, which is selected by the global competition of SMEs compared to those who monopolistically control global chains. It also stems from the  national governments’ ability to create temporary advantages in GVCs, resulting from the definition of specific strategies and the “joint” approach of private companies.

This is currently Italy’s productive point.

To bring some of Italy’s big national champions into the  geopolitical rather than economic oligopoly of the global companies leading the main Global Value Chains, so as to later organize the “voluntary” mechanisms that permit the hegemony of Italian SMEs in the various sectoral markets.

Recently my friend Paolo Savona has spoken about the “return of the  State as master”, but the future will enable us to have only two real forms of control of global value chains: either with a top-down approach, by producing universal enterprises that lead the chains, or with a bottom-up approach, by organizing the groups of SMEs that prevail – with public and private support – over their competitors in the division created by GVCs.

However, all the latest statistical analyses show us that in the Euro area countries there have been massive and now excessive share transfers of State entities, as well as liberalisations, often of goods and services which are – even in the free-trade and liberal economic tradition – “natural monopolies”, but with a significant slowdown in share transfers and divestments, which in Italy, France and Germany started as early as the early 2000s.

Furthermore, Ronald Reagan – the politician epitomizing the free-trade and liberal revival – had not at all cut public spending in general, but had cut the traditional spending for civilian Welfare, with a view to favouring his specific military Welfare.

A deficit military spending, which had no immediate inflationary repercussions, but rather acted as a technological stimulus for innovation, also in civilian enterprises.

Without “inclusive institutions”, however, i.e. without stable public organizations enabling sufficient segments of the population to have access to some wealth, all modern States tend to be relegated to be failed States, thus becoming easy prey for their structural and global geoeconomic opponents – and even at the lowest possible cost.

This is what – inter alia – Sovereign Funds are for.

In fact, they ensure the public or semi-public ownership of the enterprises that a State and a society choose – moment by moment – to guide their economic and social future in the medium-long term.

Hence the Sovereign Funds must be protected from the raids of possible and real competitors. Raids are continuous, while growth projects are temporary.

It should be recalled that in Gilpin’s opinion, the “aim of economic activities is to provide benefits to consumers, not to strengthen the State security”.

But the State security is also a primary asset, which allows to quickly eliminate adverse geoeconomic actions and hence avoid  the immediate colonization of the development potential of a State and of a society.

Edward Luttwakhas also rigthly said that any economic globalization is always strategically dangerous, since it inevitably leads to what he calls “paroxysmal competition”, which is an inevitable feature of turbo-capitalism: a very rapid increase in the size and speed of trade, always combined with post-Cold War globalization, which does not accept any geographical limit to its expansion.

If turbo-capitalism stops, it immediately melts away under the sun of value realization.

The excessive trade speed mimics its actual productivity and the size of trade sometimes masks its very low value which, however, is maintained thanks to excessive speed, which does not allow the rational and technical assessment of risks.

Hence, against the Hobbesian state of bellum omnium contra omnes typical of turbo-capitalism, which usually does not sufficiently invest in product or process innovation, we need to  think of two solutions, called the State of Economic Intelligence or the Geoeconomic State.

Paolo Savona and Carlo Jean have spoken of the ever-increasing role of economic intelligence, which should become the axis of every modern State’s economic, financial and productive choices.

Without Sovereign Funds, however, there is no economic intelligence.

Hence we need to firmly keep a sector, at least one, which is comparatively very advanced,  but above all export-led, and which is also protected with all the non-tariff mechanisms that are now commonly used in everyday economic warfare.

This is the reason why, for at least five years all the major Western countries have been rethinking their old deindustrialization and delocalization policies, which often deprive societies and States of the necessary systems for controlling global, financial and productive flows. Not to mention the fiscal deprivation and over-costs for maintaining structural unemployment.

In the evolution of the most recent international trade theory, we have even gone so far as to develop a Strategic Trade Theory, a model underlining the companies’ and State’s ability to improve the trade balance by working strategically -i.e. in the medium-long term – in imperfect global markets.

The oligopolistic markets are always those where leading products or services are developed, usually with public investment in Research and Development.

This is the true nature of the Keynesian model: the State funds  what is not yet profitable, but the private sector deals mainly with “mature” or growing companies, which have already found their market.

Hence we also need the theory of the Innovating State, i.e. the Entrepreneurial State, recently developed by Mariana Mazzuccato.

The State imagined by Mazzuccato explores the whole scenario of business risk, thus creating above all new markets. In particular, the State creates the markets in which we need to have strong investment in situations of maximum uncertainty, thus acting as a risk taker and hence later as a market shaper.

The “Administrative State” is a public administration “serving” private individuals, but the Entrepreneurial-Innovating State is the one that does not make the unemployed people dig the classic Keynesian holes, in the inevitable periods of production contraction, which is above all – Marxistically – tendential over-production.

But, if anything, the Entrepreneurial-Innovating State invests in new high-quality technologies, which create original markets where, in fact, the Entrepreneurial State controls the future oligopoly. Another role of Sovereign Funds.

Technically, however, the Funds are investment funds which manage financial asset portfolios denominated in foreign currencies, according to the global rules of what we currently call the grey economy.

In theory, the Funds are divided between those which invest resources coming from raw materials or oil and gas (SWF Commodity) and all the others which, instead, invest surpluses coming from the currency surpluses of the trade balances.

This is clearly our case.

According to the “Santiago Principles”, a code for Sovereign Funds developed based on the International Monetary Fund’s indications, the Sovereign Wealth Funds (SWFs) are “special purpose” investment funds owned by national governments.

Therefore, SWFs have five primary characteristics: a) they are always held by a Sovereign State; b) they make investment in foreign currency; c) they carry out their activities over a long term, with low indebtedness and without withdrawals or distribution of profit to participants; d) their accounting is strictly separate from that of Central Banks and Finance Ministries; e) they carry out research for investment with returns above the risk-free rate.

The first real Sovereign Funds were the Kuwait Investment Authority, created in 1953, to obviously invest the capital originating from the extraction and sale of local oil, as well as the old Revenue Equalization Reverse Fund, set up by the British administration of the then colony of the Gilbert Islands, the current Republic of Kiribati, to invest the surplus from the sale of phosphates.

The secret agreement between Kissinger and King Fahd of Saudi Arabia, after the Yom Kippur war, later channelled the extraordinary surpluses stemming from the very significant increase in the OPEC oil barrel price into US government bonds. Hence petrodollars were created.

In the phase following the booming prices of some fundamental raw materials when, in fact, oil prices plunged, namely in the 1980s, the Sovereign Funds became the primary instrument for diversifying investment and hence for the financial stability of the countries producing raw materials (or commercial surpluses) which had already adopted them.

From then until 2005, the Sovereign Funds became the main instrument, for Asian countries in particular, to accumulate and use the foreign currency reserves arriving in the Asian countries which were more export-led and more linked to the US dollar cycle.

To avoid having to resort to the often dangerous therapies of the International Monetary Fund, especially when the global reference currency fell, the top Asian export-led countries combined their industrial expansion policies with specific exchange rate policies, which tended to accumulate very large foreign currency funds.

Obviously that happened only to avoid the manipulation of  currency markets in a condition of objective weakness created by an exclusively export-oriented economy – with exports to countries having a very strong currency.

In 1978 the SWF Temasek, the “historic” Singapore investment fund, came up with the idea of using Sovereign Funds for that purpose.

Temasek invested its considerable surpluses in the acquisition of companies and financial holdings in the Asian area directly bordering on Singapore, thus making the city-State – which was also the first model for Deng Xiaping’s Four Modernizations –  overcome its structural limits, thus protecting it from enemy and adverse operations on its exchange rates and on its productive system.

Finally, from the beginning of the great subprime crisis, the Funds have spread mainly in the so-called BRICs (Brazil, Russia, India, China and South Africa) and also in some “First World” countries, especially to acquire minority shareholdings or to carry out hostile takeover operations towards competitors or potential penetrators of their national markets, possibly even with dumping actions –  and it would not be the first time.

In 2020 SWFs are supposed to reach, worldwide, an amount of managed assets of approximately 15 trillion US dollars.

75% of the capital managed by the Funds is currently concentrated on the top 10 operators. Obviously the SWF market is highly oligopolistic and the top 10 operators are now all Middle East or Asian entities.

The history of modern European Sovereign Funds began with  Sarkozy’s Presidency in France.

As early as 2008, the French centre-right leader set up the Fond Strategiqued’ Investissement (Strategic Investment Fund), based on two already existing financial structures, namely the Caisse des Dépôts et Consignations(the State Bank handling official deposits, which is the equivalent of the prominent Italian investment bank known as Cassa Depositi e Prestiti) and the Fond de Réserve pour les Retraites(Pension Reserve Fund), with capitalisations – at the time – of 80 and 33.8 billion Euros respectively.

However, 51% of the new French Sovereign Fund was owned by the Caisse des Dépôts and the remaining 49% by the Agence des Participations d’État (Government Shareholding Agency).

The aim of the Fund created by Sarkozy was to invest mainly in French and foreign small and medium-sized enterprises, characterized by strong growth but having no longer access to standard market financing (although we do not know why).

The French Fund also set in when the company was overtly  threatened by a hostile takeover, or any acquisition, by foreign companies.

The French Fund could also intervene directly in the capital of innovative industries.

As early as 2008, however, the Italian intelligence Services have focused on the very strong need to protect the national know-how, considering that the operational plans of other Sovereign Funds interested in Italy could be useful for acquiring specific technologies.

It has already happened: in the machine tools, agri-food,  specialized pharmaceutics and fine mechanics sectors, Italy’s top large SMEs have already been acquired by French, German and Chinese companies.

In their report to Parliament in 2010, the Italian intelligence Services already spoke of a “liquidity threat” to Italy’s companies.

The foreign private equity funds, in fact, are mainly targeted to banking, biotechnology, energy, entertainment and even online gaming companies.

Currently, however, the Cassa Depositi e Prestiti has two instruments to support companies, especially the technologically advanced ones: the Italian Strategic Fund – now CDP Private Equity – and the Italian Investment Fund.

The latter was launched in 2010, with the collaboration of some private banks, and – as usual – it is targeted primarily to small and medium-sized enterprises.

It has two operating structures: the Venture Capital Fund for innovative start-ups and the Minibond Fund, which supports the bond issues of small and medium-sized enterprises.

The Italian Strategic Fund – 90% of which is held by Cassa Depositi e Prestiti(CDP) and the remaining 10% by FINTECNA, which is in any case fully owned by CDP – was launched in 2011 with a capital of 4.4 billion Euros and, as already mentioned, rose to 7 billion Euros.

However, why setting limits?

The Italian Strategic Fund was born with a negative experience to be made good, considering that those were the years of the takeovers for Parmalat, which had just been redressed financially, and for Bulgari, not to mention the future and possible “friendly” sales – well hyped by the Italian media- of Alitalia and Edison.

The Italian Strategic Fund dealt mainly with medium-large companies having “significant national interest”, while, from the beginning, it created strong ties with Qatar Holding, the Russian Direct Investment Fund, the Kuwait Investment Authority and the Korea Investment Corporation.

Moreover, in 2012 the Italian Strategic Fund signed an agreement with Qatar Holding LLC for the creation of a joint venture, called IQ Made in Italy Venture, to invest in the typical Made in Italy companies.

The idea, which has not yet fully materialized, was to create a “luxury district”.

The Maastricht restrictions on the so-called “State aid” always make it difficult for the Italian Strategic Fund to operate. It would possibly need an arm abroad, capable of operating on our companies without EU constraints. It would also be necessary to deem it legitimate for the Italian Strategic Fund to invest in companies of significant national interest, but regardless of the average return on the capital invested in the medium term.

Therefore, unlike the old twentieth century economic statism, the Italian Strategic Fund invests in healthy companies and it plays -quietly and without nervousness – the role of minority shareholder. It also follows the private criteria of investment profitability and efficiency and does not follow the natural distortions, often originated by public entities, but also by powerful private entities, to manipulate production formulas and intermediate markets.

Hence rethinking and expanding the Fund’s operations, or possibly creating specific areas of intervention for the Fund,  would be an excellent evolution of the fundamental policy lines on which the Italian Strategic Fund was conceived.

 

GIANCARLO ELIA VALORI

Honorable de l’Académie des Sciences de l’Institut de France

President of International World Group