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Notes on companies in temporary economic difficulty

In the previous article, I mentioned, in the context of the more complex issue of extraordinary finance and the intervention of private capital in SMEs, without ignoring, for the same reason, large companies, the problem of the possibility of also helping companies in temporary economic difficulties.

We are talking about a particularly delicate issue.

As is known, the fund uses money that has been entrusted to it to be managed in the best possible way, with results of value increase over time.

The situations that lead the company to temporary economic difficulties can be very diverse.

In this sense, each case is unique.

The question we must ask is whether it is possible, on the part of a fund, to consider the possibility of entering the share capital of a company in temporary economic difficulty.

We must then talk about rescue financing funds, which allow private investors to support the relaunch of solid companies, but in temporary difficulty.

These are companies with high turnover, indicatively above fifty million euros.

When we use this terminology, we do not mean to refer to realities of investment collection, to support the real economy and the growth of companies, to increase their turnover, profitability, size, employment, presence in the markets, which differ from each other.

The fund is an entity that is characterized by different types of investments, collected for different purposes, which can be private equity, private debt, merger and acquisition operations and also rescue financing, and so on.

Not only one fund is headed by a group, but many different funds.

It is perhaps superfluous and misleading to delve into strictly technical issues and terminology, which can distract the reader’s attention from the purpose pursued in the field of corporate finance and, above all, extraordinary finance.

In this regard, I refer to a case, which occurred very recently, which concerned an Italian company, very established, among other things, in the field of utensil production for the food market.

The operation was carried out through the establishment of a new company.

The company had resorted to negotiated composition of the crisis, but the procedure had ended with a negative outcome.

Subsequently, the company had access to the simplified agreement, due to the negative trend of management, mainly attributable to the increase in raw material and energy costs.

The interested investment fund, which had provided pre-deduction financing, during the negotiated composition procedure, although well covered in a possible liquidation scenario, decided to reinvest a considerable amount in the company to ensure business continuity.

The operation, which ended with the acquisition of a business branch, also led to the protection of over a hundred jobs, with the need to create new ones.

This is not the only case of support to companies in temporary economic difficulty.

The same fund had and has accompanied, for their respective relaunch, other companies, active in the sector, for example, of silk production, a gem of Como entrepreneurship, which exports all over the world, as well as a company specialized in the management of sites and large public and private structures dedicated to recreational, cultural, educational and scientific research activities, and a company has also been assisted, which deals with diversified activities, such as road works and services, waste management, remediation and green care.

As can be understood, the field of business activity can be greatly diversified, in the sense that there is no longer a category of privileged sectors.

The fundamental circumstance is that these are companies active in important markets, which can increase turnover and profitability and all that has already been reported in the preceding lines.

At the same time, it would be very difficult to think of involving a fund, when the company has already started minor procedures, such as the negotiated composition of the crisis.

The late request for a fund’s intervention could preclude the path of intervention in the share capital, in the extraordinary finance operation, with all the consequences that may arise.

In the face of situations of temporary economic difficulty, the first interlocutor to be heard is precisely the fund and not to pretend to follow strategies, such as contact with banks or, even more simply, an application for admission to the negotiated composition of the crisis.

When an entity dealing with extraordinary finance, of particular prestige, profitability and negotiation capacity, as well as inspired by strict ethical criteria, is activated, the entrepreneur is already in a situation from which he sees the solution to his crisis.

It is obvious that an investment fund subjects the entire economic and financial situation, the company’s assets, to a very careful analysis, through a rigorous examination of various indices, information sources, balance sheets, internal evaluations of its own team.

Otherwise, we would be faced with adventures with no return.

It is equally logical that the fund must agree to intervene to remedy the company’s temporary crisis, a circumstance that depends more on problems related to the company’s ability to stay on the market, to recover from the negative situation.

The fundamental point, from which the entrepreneur must start, is what I already wrote in my previous article.

When we talk about finance, we think of a world of sharks where the law of the strongest prevails.

In similar terms, I have already expressed myself with reference to the behavior and mentality of the entrepreneur, who considers the company his creature, and does not accept alleged intrusions by third parties, who enter the share capital, even with majority shares.

The reality has profoundly changed.

The entrepreneur cannot do it alone or continue to accumulate debt through bank loans, now very rare and absolutely obsolete instrument.

The entrepreneur must first of all reflect on the circumstance that the entry of a new partner, who provides liquidity, does not create any debt for the company.

As a result of this intervention, the company is put in a position to use what is called risk capital, that is, share capital, to cover new investments, increase production, look more and more at new markets, safeguarding Italian-ness.

Risk capital is, in all respects, the indispensable means to start a new activity.

But you have to know how to manage it.

In my opinion, the entrepreneur must not touch his personal assets, except to invest in capital increase.

All these problems, fit into the broader context of the need for a profound renewal of the industrial fabric, which goes from very high-level consulting activities, to the inevitable need to enlarge the size of the company.

Author: Claudio Gandini
Iscritto all’Ordine degli avvocati di Milano e patrocinante presso le giurisdizioni superiori ed a quelle dell’Unione Europea. Svolge attività in materia di consulenza d’impresa.