Before returning to the topic of the fundamental importance of the interaction between the real economy, extraordinary finance, and business, I would like to delve into some fundamental concepts, although not always easy to grasp.
In the introduction to my latest article, as mentioned earlier, I invoked the words of a giant who illuminated the world: John Fitzgerald Kennedy:
“Do not ask what your country can do for you, ask what you can do for your country.”
This phrase, excerpted from a more complex speech, goes far beyond the meaning that could be attributed to it. In political, economic, and legal terms, this statement underpins the value of the liberal approach to the state and the economy, which differs from the more pronounced liberalist approach. In this system, the centrality of an organized community is based on the human being, and in economics, on free enterprise.
In the Italian language, “liberismo” (liberalism) and “liberalismo” (liberalism) do not have the same meaning: while the former is an economic doctrine that theorizes the detachment of the state from the economy (thus, a liberal economy is a market economy only tempered by external interventions), the latter is a political ideology that advocates the existence of fundamental and inviolable rights belonging to the individual and the equality of citizens before the law (formal equality).
I won’t dwell on the interference of political doctrines with the democratic system. I’ll just remind you that all choices in organizing the community can only be translated into legal norms of different rank.
In fact, the different liberal economic doctrine has found and continues to find application in various states, albeit with variations, in cases of exceptional gravity, through state intervention in the economy. Franklin Delano Roosevelt, four-term President of the United States, found himself having to deal with the American Depression, which could have involved the Western world in a very dangerous adventure with no return.
President Franklin Delano Roosevelt launched a new course, known as the New Deal, which would define his policy and be characterized by a strong state intervention in the country’s economy. The first field of application of Roosevelt’s reforms was the labor market since the President believed that the phenomenon of unemployment (devastating after the Wall Street crash and the collapse of industry) needed to be “partially resolved through direct recruitment by the government itself.”
In essence, the central American government had endeavored to become a sort of employer. Furthermore, the New Deal included the introduction of corrective measures to the financial system through “strict supervision of all banking operations, credits, and investments” and the end of “speculation with other people’s money.”
There were indeed resistances to the New Deal programs, especially from large corporations, and a setback occurred due to the declaration of unconstitutionality of some provisions by the Supreme Court. It is hard to imagine that Franklin Delano Roosevelt embraced socialist state policies.
Roosevelt, even though he did not completely succeed in revitalizing private economic initiative, had the merit of understanding that it was necessary to find a way to regulate the market by implementing corrective measures to prevent the recurrence of speculative phenomena that had triggered the crisis and the Great Depression.
In Franklin Delano Roosevelt’s thinking, the need to reinvigorate private economic initiative, as I mentioned earlier, remained. In a much more recent period, the President of the United States, Donald Trump, in the face of the Covid tragedy, adopted a series of measures to assist businesses and individuals by directly depositing sums of money into the recipients’ bank accounts within a few days.
This choice subsequently led to a strong growth in employment demand, along with an increase in inflation, which the Federal Reserve is currently trying to limit through a 25 basis point increase in the cost of money, according to the recent communication of July 26, 2023, which has also sparked vigorous protests in the United States.
What I have written in the preceding lines is intended to support the idea that state intervention in the economy should be reserved exclusively for cases of exceptional and extraordinary crises, as happened in the United States with Franklin Delano Roosevelt in the mid-1920s of the last century, as well as during the Covid pandemic in the USA and Europe.
Within the EU, different behaviors were observed among the various member states.
The organization and delivery of essential and fundamental services and the guarantee of upholding the rights enshrined in the Constitution remain the responsibility of the state and local authorities. Outside of these areas, private initiative must be the foundation of the country’s economy and its development.
Italian history has shown us how our state has long been involved in numerous economic sectors to the detriment of competition. It did so, for example, in the electricity, telephone, gas, and water sectors. The phenomenon of the entrepreneurial state took on significant dimensions in the post-World War II period, but from the early 1990s, it saw a clear trend reversal with the initiation of a broad privatization program.
It is noteworthy that public opinion is still heavily imbued with statism: private sector involvement, especially in essential services, is viewed with suspicion and mistrust, out of fear of a theorized incompatibility between profit and the collective interest. However, our experience has demonstrated that public intervention in the economy is no longer advantageous for citizens, often marred by inefficiencies and wastefulness, resulting in services of poor quality, with little inclination for innovation and market competitiveness.
In light of this premise regarding the political, economic, and legal organization of the country, I would like to return to the intersection of our real economy, extraordinary private finance, and businesses.
By “real economy,” we mean that part of the economy connected to the production and distribution of goods and services. The real economy includes businesses, the goods they produce, land, real estate, machinery, and all other assets related to production, as well as service providers. In this context, employment, a source of productivity and income for businesses, should not be forgotten or underestimated.
The more opportunities are created to increase employment within the real economy, the greater the productivity of businesses. Within the real economy, businesses seek resources to carry out their productive investments in equipment, technology, and human resources.
In a sense, I am returning to the point from which I started in the first article, also posted on LinkedIn. Modern economics can only be based on the intersection of private finance and business.
It is well known that small and medium-sized enterprises constitute the backbone of the Italian economy. It’s no secret that despite the increase in employment, businesses are in crisis. This calls for new choices, some of which have been acknowledged and articulated by the Council of the European Union.
In the Recommendation of May 22, 2018, regarding key competences for lifelong learning, the EU highlights key competences as fundamental skills. These competences empower citizens to autonomously acquire new knowledge and skills throughout their lives. Among the tools for lifelong learning, we also find entrepreneurial competence:
“Entrepreneurial competence refers to the ability to act on ideas and opportunities and turn them into value for others. It is based on creativity, critical thinking, problem-solving, initiative, and perseverance, as well as the ability to work collaboratively to plan and manage projects with cultural, social, or financial value. Essential knowledge, skills, and attitudes related to this competence are:
- Entrepreneurial competence assumes an awareness that different opportunities and contexts exist in which ideas can be turned into actions in personal, social, and professional activities, and an understanding of how these opportunities arise.
- People should know and understand project planning and management approaches, both in terms of processes and resources.
- They should understand economics, as well as the social and economic opportunities and challenges faced by employers, organizations, or society.
- They should also be aware of ethical principles and sustainable development challenges and be conscious of their own strengths and weaknesses.
- Entrepreneurial skills are built on creativity, encompassing imagination, strategic thinking, problem-solving, critical and constructive reflection in a context of evolving innovation and creative processes.
- These skills include the ability to work both individually and collaboratively in a group, mobilize resources (human and material), and maintain the pace of activity.
- This encompasses the ability to make financial decisions regarding costs and values.”
The ability to communicate and negotiate effectively with others and to manage uncertainty, ambiguity, and risk as factors in making informed decisions is essential. An entrepreneurial mindset is characterized by initiative, self-awareness, proactiveness, foresight, courage, and perseverance in achieving goals. It includes the desire to motivate others and the ability to value their ideas, demonstrate empathy, take care of people and the world, and accept responsibility by applying ethical approaches at all times.
“Entrepreneurship” is a choice as crucial as it is challenging. An enterprise is a legally organized community where a series of very complex issues intersect. There are both internal and external problems. The bridge that connects these two sides of the coin, so to speak, is financial-economic balance. If Franklin Delano Roosevelt, in addition to contributing significantly to defeating Nazism and fascism in Europe, had the insight to recognize the need for a new course, the New Deal, the recent recommendation from the Council of the European Union seems to outline the horizon of the new world of enterprise, along with the economy and finance.
I have already stated that the banking system is outdated. Large areas of the country no longer have bank branches. It is also well known that businesses are struggling. Seeking a bank loan, which is now very difficult to obtain and high-risk, creates debt for the enterprise. Many entrepreneurs, who could see their businesses grow and invest in new high-quality productions, markets, increased employment, refuse to consider a temporary alliance with a fund that safeguards the Italian identity of the company and its development, increased turnover, and profitability because they believe that they should remain the sole decision-makers, so to speak.
This is an outdated idea. It is true that funds that choose to invest in Italian businesses contribute capital and, therefore, risk, and require majority ownership in the company. However, this does not take away control from the entrepreneur. The fund needs to raise money to repay the investors who have placed their trust in it.
Among these, in various parts of the world, there are the so-called institutional investors, including banks, even the largest in the world.
If a bank believes in entrusting itself to a fund to increase its profits, evidently the reason is that this result can and should be achieved outside the banking system. The entrepreneur is asked to continue working well and better, being enabled to use the fund’s investments to modernize the company, create new products, expand into different markets, diversifying them according to potential moments of crisis in this or that area. The fund must recoup the investment, plus a profit, which should be distributed between the fund itself and the investors. The entrepreneur, as a partner, sees their earnings increase in proportion to their stake in the share capital.
In the realm of private equity, the enterprise must be appealing, able to compete in the market, and open up new market spaces. It must be at least a small business, with an annual turnover of at least two million euros. Medium and large enterprises are not excluded. The investment sectors are highly diversified, from agriculture to catering, to new technology applied to the latter, to food, to beauty centers, and so on. Even the travel agency sector has received the support of private equity funds.
The focal point from the aforementioned recommendation of the European Council, in my humble opinion, is represented by the frequently mentioned concept of “creativity,” to which I feel deeply connected, just like to dreams. Dreams must be translated into projects, based on sound and careful pragmatism and concreteness. What is creativity if not the dream translated into a concrete intuition of the human being?
The second fundamental point, personally, I identify in the ability to “make financial decisions.” Normally, participation in the company’s share capital lasts for five years. Everything is regulated by binding and secure social agreements, ensuring the position of both parties. The exit phase of the partner may take up to an additional five years, depending on the agreements and concrete opportunities.
This time frame depends on the entrepreneur’s willingness to repurchase all the shares to be returned within a variable time frame or the need to find a new industrial or financial partner, i.e., another fund, or different evaluations and opportunities.
The entrepreneur will not find themselves in the initial situation but with a company with higher profitability, turnover, and size. Ultimately, the company will be larger, more competitive, and better equipped to expand further.
The fund’s objective is often to accompany the company in which it has entered as a partner to go public, with the creation of new investments in share capital, which, in this case, becomes floating capital.
It might seem like a bizarre and somewhat impressive or unfamiliar scenario, but it’s already part of the history of companies that have relied on the private finance sector.
Regulations provide for tools for business aggregation, such as business networks. In my opinion, they are already outdated in terms of economic and entrepreneurial needs.
It would be much more convenient and profitable to create a holding company for shares, to which each company contributes its assets, with the participation of a private equity fund.
Of course, one cannot expect a fund to enter with a majority stake exceeding 60-65% of the share capital. It is evident that the entrepreneur must participate in the increase of the share capital to balance the positions among the partners. Otherwise, it would be like trying to do business with other people’s money, a scenario unknown to the natural and economic reality.
I reiterate. Unlike bank loans that create debt, entering the share capital of a third party does not. The Italian business, a global excellence, deserves to grow using more modern tools.
A bank that grants a loan, regardless of whether it involves impossible and very risky cases, is a creditor that costs, and naturally, wants the money back, along with interest. This does not happen with a private equity fund, which is a partner that earns from dividends, just like the entrepreneur, and, at the end of the relationship, sells its share of participation. We need to be more precise.
A private equity fund must earn a return on the invested capital. From this, the economic return for the entrepreneur follows.
The underlying principle of choosing to increase production capacity, profitability, and turnover of companies through private finance, with extraordinary operations, is ultimately the creation of new wealth.
This task is entrusted, first and foremost, to the entrepreneur in a liberal economic system. In this sense, I would like to recall a statement by Nobel Prize winner in economics, Franco Modigliani, an Italian naturalized American:
“The entrepreneurial abilities of Italians are unique in the world. If Italy had a serious political, administrative, and social system, it would be the first country in the world. Ahead of everyone. Even the United States.”
So, is it possible to overcome a bureaucratic system from the 19th century that is still organized against the country’s interests and has been dysfunctional for decades? Is it possible to overcome the crisis of representation in the political system?
In my opinion, the modern economic system is capable of addressing all these problems. We need to change our mindset, look to new horizons based on tools already available. Do we want to embrace the reflections of Franco Modigliani and take on the challenge that arises from them?
Italian companies must grow and become increasingly competitive while ensuring our excellence in all sectors at a price that can still encourage buyers to purchase Italian products in a competitive and fair market.
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.