From a speech given at the Olivetti day: “How to finance innovation and why it needs to be done.” Brescia, Italy, 16 October 2015
Italy is experiencing a period of extraordinary importance for its future.
If current developments have positive outcomes, a virtuous circle could be created with the potential to launch a new and much needed revival.
To draw on illustrious examples, such as that of the great Adriano Olivetti, should help to motivate concrete actions, as does the success of this gathering animated by entrepreneurs and young businesses.
The structural crisis erupted in 2007 – an epochal crisis whose faults are yet to be repaired. The relationship between capital and its deployment has undergone a derailment. Following a complete freeze, the flow of capital to enterprises and innovation remains stagnant.
Our small and medium-size companies, the engine room of the economy, have historically heavily relied on the banking system for their financing needs. For them, the effects of this monetary crisis have been devastating. The public – the Italian families – have suffered a lot.
The crisis has also resulted in the abnormal compression of the time horizon of the investments, down to the nanosecond, where enormous amounts of liquidity have been directed. This is a sign of the gravest evil of the century. What in fact can be created in a nanosecond?
Looking for yield, huge capital was directed towards wrong investments like raw materials and commodities, creating distortions and financial bubbles ready to burst. Very high additional liquidity offered by central banks to the banking system has been largely retained within it, and the levels of interest rates became negative, thus harming our nation of savers.
The paradox of “constipation of capital”, suffered by institutional investors who cannot find assets which offer a good return, became the other side of “the financial drought,” faced by small and medium-sized enterprises, who remain without sources of capital and funding.
This has stifled the necessary investments in technical capital, into research and development and into new opportunities, and has created a collapse of confidence. The average life of Italian manufacturing plants is now 20 years.
I hold out my analysis to include the necessary “cleaning”, and rationalization of the entire public administration, the development and revival of a common civic sense, restoration of the rule of law and observance of a common set of rules.
There is an opportunity here, and the country’s ability to meet this challenge depends on the various stakeholders’ ability to attract and employ the right capital resources for innovation. We must support the productive activities of small and medium enterprises, and through them we will support the real economy. An important contribution should come from our institutional investors and pension funds. Private savings would also be able to give a strong boost.
Italy, with little awareness, has great economic, productive and social skills that, despite serious damage suffered through this terrible period, remain the trump card for its economic and political success.
The ‘American’ economic and business model has promoted companies of abnormal size, impossible to manage, but which can dictate prices and markets and blackmail the states because the public pay for their failures, and their fraud. Volkswagen is only the latest in a long series that came to light.
Companies of huge size were in the past justified to some by the logic of economies of scale. Now our new technologies, the diffusion of free and immediate information, and interconnection of markets make those factors significantly diminished in their importance. A degree of vertical integration is now possible in many areas by companies of small and medium size. This calls into question the validity of numerous corporate mergers in various industrial and financial sectors.
Italy has many innate strengths: the average size of small and medium Italian companies; the presence of local economies based on local values; innate ability for creativity, innovation, and also for knowing how to make do with that which is available; a value in the social function of the enterprise; a fabulous international goodwill as a country full of history, top fashion, style, best food, and technical ability. These are the best ingredients to give rise to sustainable economic development, which can bring the country back to full employment, confidence in the future, and a new Risorgimento.
Nevertheless, the Italian companies have to make a leap of quality and gain a more extensive international presence. Not only to design and create new products, but to know how to benefit from their international spread and deployment. To do this is needed capital, and cultural development, i.e. good management; both essential to give our companies the opportunity, not only to innovate, but then also to reap the benefits of their ability to create new products and services, and then to follow the right path to internationalization, creating a host of innovations, and encouraging the development of others.
Moreover, despite the shift to a post-industrial economy heavily based on information, mankind will always need goods that require manufacturing, especially that of high quality, in all areas.
On this front Italy still has a huge legacy, despite strong damage, an erroneous tendency to manufacturing relocation, denial of our cultural enhancement and of our beautiful crafts, and failing to value manual labour. This legacy is a true competitive advantage to bring back into vogue those “Made in Italy” products that the world has so much appreciated, with the obvious benefits for the Italian economy.
For decades, the investor was searching for Alpha.
The hope was that, thanks to the ability of the investment manager, returns would be substantially constant over time, and not influenced by trends, and market volatility.
In reality, many managers have largely failed this goal, and have turned away more and more, not only from what they had promised, but in general from the real economy.
Today the answer to generate Alpha, is what I call “direct investments in the real economy”. This signifies a whole set of new tools and channels that fill in directly the gap between investors and entrepreneurs, with the necessary transfer of capital and equity investments.
It presents an opportunity for investors, savers and entrepreneurs. The real Alpha can be achieved by selecting a diversified portfolio of industrial companies committed to innovation and growth, by investing directly into these, and by solving for the investor the problem of fragmentation and single risk
However, to attract this capital, companies have to accept a new function: to open their doors and make an effort with external communication and research to identify, attract, and select the investors that are most appropriate for its situation and goals. Suitable investors would be those who share a similar spirit and who have a time frame that will allow the enterprise to achieve its full potential.
It will be necessary to consider a new culture of the family businesses, and to offer these new forms of raising capital and financing.
The right professionalism will have to be employed to bridge the gap between the company and potential investors. We need new technical tools, forms of “light” listings, and new ways to attract the right capital. It will be relevant to open the company and offer investors transparency and a direct exchange of information. Yet, a successful company will never forget its corporate, social, ethical and territorial value, its origins and its strengths and responsibilities.
A golden rule is to have an accurate understanding of the capital market and all the available choices of capital, before having the need to use it. Therefore directors should undertake wide research in relation to access to capital, shareholders and partners of quality, before actually needing them.
In fact, when you require capital urgently, it is too late to find and select the right investor, the right partner, and to be able to obtain the right conditions.
In Italy there is a huge untapped potential for “direct investments in the real economy” to be deployed to increase the companies’ value.
Especially in this particular period of recovery, the entry of an investor of quality, the right investor, can increase the enterprise value, by the mere fact of this new presence, and also because of increases in its development potential – making future plans possible and opening up new avenues.
As a whole, this value enhancement is not only a strengthening factor in capital terms, but it offers independence, it opens opportunities for acquisitions of new technology and other businesses, and it is so able to elicit a productivity increase, markedly increasing export capacity, therefore increasing the Gross Domestic Product.
Together with the indispensable restructuring of the Italian public administration, this will make a difference, to jump-start the domestic demand, without which there could not be a full and sustainable employment.
Italy can and must accept this challenge.
Some of the companies participating to this initiative of the Olivetti Day were those that with pride and courage, have designed and successfully realized the manufacturing of the Tree of Life, perhaps the most illustrative symbol of the Milan Expo exhibition.
A renewed hope for the future of Italy. An example of great team playing, the ability to make great sacrifices, and to excel. These firms accepted a last minute call and managed to achieve a “Mission Impossible” task, showing that Italy can succeed and must accept the challenges that it is currently facing.