By Pamela Barbaglia and Stephen Jewkes
LONDON/MILAN, May 23 (Reuters) - Investment firms, including buyout fund EQT, are flocking to Milan to develop closer ties with Italy Inc, where cash-starved family-owned companies are increasingly seeking foreign capital to boost growth.
The search for real estate in the financial capital of the euro zone's third largest economy comes as uncertainty around Britain's departure from the European Union and lucrative tax incentives tempt Italian dealmakers living abroad to pack up and head home.
Similarly, London-based private equity firm THCP, which manages more than 1 billion euros of assets, is finalising plans to open a base in the city after the summer, to be led by partner Michele Prencipe, the sources said.
Alternative asset manager Hayfin Capital Management has also agreed to lease an office from June in the Brera district, boosting its European network which already includes London, Frankfurt and Paris among others, another source said.
EQT declined to comment while spokesmen at THCP and Hayfin confirmed the plans.
Milan started to emerge as a destination of choice for major private equity firms in the late Nineties, but after the boom years of 2005-2007 local teams were dramatically downsized, under pressure to cut costs during the financial crisis and with scarce opportunities for multi-billion euro deals.
"Italy is one of our leading markets thanks to its large number of family-owned companies," said Astorg partner Lorenzo Zamboni who launched the fund's Italian office in September.
Paris-based Astorg - which focuses on mid-market investments and manages more than 8 billion euros of assets - clinched its first Italian deal in 2014 when it bought power transmission belts manufacturer Megadyne.
THCP - another mid-market investment firm which provides growth capital in exchange for minority stakes - has so far invested about 300 million euros in Italy and wants to use its Milan base to deploy more capital in the country.
Founder and managing partner Mauro Moretti pointed to the large number of Italian companies which generate the bulk of their revenues abroad as a sweetspot for international investors.
"Their export-driven strategy is a unique and attractive feature," he said.
SILICON VALLEY OF BAD LOANS
Despite being active in Italy since 2015 when it announced plans to buy medical device firm Lima, EQT has so far managed its investments in the country from its Zurich and Munich offices.
Now the Swedish firm, which is backed by the Wallenberg family via Investor AB, is looking to move three of its dealmakers to Milan this year, including managing director Federico Quitadamo who will oversee the Italian rollout, the sources said.
Credit-focused investors are also circling the Italian market, where local banks hold about 189 billion euros of soured loans.
"There is growing appetite for distressed deals in the country and no wonder investors are flocking to Milan," said a banker based in the city. "Italy is the Silicon Valley of bad loans."
Founded in 2009, Hayfin is one of Europe's leading alternative asset managers, investing in anything from non-performing loans and structured credit to real estate debt. It is actively growing its presence in Italy, eyeing a wide range of deals.
"We see attractive investment opportunities in both primary and secondary transactions and a growing role for private credit investors with patient and flexible capital," said managing director Stefano Questa.
"Our focus on Italy is not driven by near-term considerations, but instead is part of Hayfin's approach of building a sustainable, long-term presence in the major European markets."
Italian banks have accelerated the sale of bad loans in the past two years, offloading debt with a gross value of 140 billion euros since 2017. Their focus is now shifting to 'unlikely to pay loans', which had a gross value of 83 billion euros in December.
Most credit investors in Italy tend to partner or take control of local debt servicing firms. U.S. hedge fund Elliott, for example, relies on its majority-owned Italian bank Credito Fondiario to manage the recovery of the non-performing loans it has bought.
But competition is fierce and investors want to stay close to local clients to prevail in auctions.
Generous tax incentives are also encouraging Italian investors to return to their homeland.
An annual flat tax of 100,000 euros on all income from foreign investments, known as the non-domiciled tax regime, appeals to general partners of private equity and hedge funds whose compensation includes so-called carried interest (carry), which is a share of the funds' profits.
Algebris Chief Executive Davide Serra, who founded the London-based hedge fund in 2006, is among those who took advantage of the flat tax rate and moved back to Milan, a source familiar with the matter said.
Serra did not respond to requests for comment.
An existing 50% tax break for Italian workers returning from abroad has been hiked to 70% as part of the government's Growth Bill or Decreto Crescita.
The bill, which Parliament needs to approve by June 29, grants a more generous 90% tax break for five years to those moving to some Southern regions. All incentives will be extended for a total of 10 years to those who buy properties in Italy or have children.
"If it goes through, this will be Europe's most attractive tax bill for country nationals living abroad," said Marco Cerrato, a partner at law firm Maisto e Associati which specialises in tax law from offices in Milan and London.
"Most people relocating from cities like London are highly-skilled professionals who tend to bring business to Italy, open offices and recruit locally."