On a recent trip to Italy, it was surprising to learn that millions were engaged in “revenge tourism” in response to prolonged Covid lockdowns. While most everyone seemed perfectly pleasant, it was nonetheless still jarring to be about 1,000 miles from Ukraine (equivalent to Boston to Chicago) where the largest European war since World War II is raging amid such devastation.
Additionally, Italy was still mourning the death of former Prime Minister Silvio Berlusconi, who had been in and out of Italian politics (and in and out of legal trouble) for over three decades as the leader of the center-right political party, Forza Italia. And Europeans were struggling to come to terms with the recent and searing loss of several hundred migrants on the doomed 100-foot Adriana which sunk on its journey to the southern coast of Italy, where so many were now avenging Covid lockdowns. A tragic parallel of two very different groups pushing to get to Italy.
The current Prime Minister Giorgia Meloni, a right-wing populist elected in fall 2022, campaigned on a platform of lower taxes and aggressive strategies to reduce immigration. Over the years Italy has been characterized by significant political volatility (the Meloni government is the 67th since World War II) which has undermined its ability to be a consistently robust economy. Currently, S&P and Moody’s both attach the lowest investment grade credit rating to Italian government bonds, one notch above junk bond status with rates nearly 200 basis points over equivalent German government bonds.
Notwithstanding a nearly 40% increase in the iShares MSCI Italian ETF (a reasonable proxy for Italian equities) over the last 12 months, the current economic situation remains challenged. National debt as a percent of gross domestic product registers at nearly 140% as compared to 98% in the United States, limiting private capital flows into more productive assets. Italians are eagerly awaiting the €200 billion distribution from the European Recovery Fund, due by 2026, to address the significant lingering impacts from Covid.
Consistent with many economies around the world, Italy is also confronting a dramatic spike in inflation and the commensurate increase in interest rates in an attempt to reduce further inflationary pressures. As a member of the Group of Seven countries (G7), Italy has been part of a coordinated response and now has a central bank rate at approximately 4.3% (as compared to the 5.25% in the United States). This rapid increase in and magnitude of interest rates is likely to introduce secondary concerns as the cost of capital increases and servicing government debt draws more capital out of the private economy.
G7 Central Banks Now Dealing with Inflation, Prompting Further Central Bank Rate Hikes
G7 Economies Average Policy Rate (%)
Source: Bloomberg
Arguably, many of today’s global issues stem from the movement of populations, either willingly or being displaced unwillingly. While migration usually is catalyzed by political dislocations, it can often be severe changes in climate that trigger such relocations, typically moving away from the scorching equator.
Demographers in Italy have taken to referring to a “demographic winter” due to a significant decline in birth rates, which is the most acute in all of Europe. To support a sustainable population, the birth rate must be 2.1 children for each woman; in Italy it is currently 1.24. In 2022, there were 393k births which was a 1.8% decrease from 2021 and 27% lower than twenty years ago in 2002. In fact, the 2022 level is the lowest since 1861. The highwater mark was 1 million births in 1964. Government estimates project that Italy will have 48 million people by 2070 as compared to 59 million today. A recent survey showed that 22% of all Italian women born after 1980 are childless.
While the Meloni government has introduced tax incentives for women to have children, the issue of immigration is even more controversial when viewed through a broader population lens. Notwithstanding her campaign rhetoric, the Prime Minister has yet to adopt harsh anti-immigration policies, even in the face of poisonous fringe political party commentary, perhaps in an effort to stem the population decline. In fact, this week Meloni announced intentions to issue 425k work permits to non-European Union people through 2025. Immigrants tend to have larger families, obviously contributing to overall population growth, but also while exacerbating cultural tensions. Ironically, though, with greater assimilation even immigrant women tend to exhibit lower birth rates.
An economic study at Rome’s La Sapienze University concluded that higher fertility rates is correlated with higher employment rates for women, which is only 52% for Italian women as compared to 73% in Germany. Unfortunately, 15 years after the first child, Italian women tend to have incomes ~50% of that of childless women. Somewhat confounding, two weeks ago the Meloni government moved to ban all Italian women from having a child via surrogacy abroad.
Two principal ingredients for a robust innovation economy are talented (young) entrepreneurs and sufficient risk capital – and capital will always follow great talent. Notwithstanding the economic issues which the Italian government is confronting, and they are significant, it may well be the demographic issues which will have a greater more enduring impact, and that data are starting to reveal themselves in recent venture capital investment activity.
While there has been compression in venture capital investment activity across the board, the European venture capital pace has seen a particularly notable reduction. Pitchbook has tallied a total of €31.5 billion invested in 4,449 deals in 1H23 across all of Europe, of which 35% were early-stage investments. For all of 2022, there was €104.1 billion invested in 12,829 companies. A similar analysis by Atomico and Crunchbase (below) concluded that 2023 is on pace for $51 billion of venture capital investment across Europe, which would be a dramatic decrease from the $83 billion in 2022. Obviously, global economic conditions and the conflict in Ukraine have dampened overall investment activity.
There has been a chronic debate about the relative valuations between geographies. Even in the United States, many believe that there is a “Silicon Valley premium” applied to investments for west coast deals. The discrepancy is meaningfully greater when looking at European opportunities. Atomico and Crunchbase analyzed European investments by stage over the past decade and identified a consistent discount of approximately 40% when compared to the median (blue line), trailing 5-year average (yellow line), and trailing 10-year average (red line) valuations. Of course, as seen in the United States, there was also a significant increase in valuations between 2020 – 2022 in European early-stage investments.
According to Vestbee, a European matchmaking platform for start-ups and investors, the Italian venture capital industry ranks twelfth in Europe in 2021, notwithstanding that it is the fourth largest European economy. At the end of 2022, Traxcn identified 195 venture capital firms that are actively investing in Italy. Tracxn goes on to inventory nearly 28k start-ups in the country, which is likely over-stating the vibrancy of the ecosystem as the list includes companies that were once start-ups, even if they are now significant multinational companies. The Italian corporate landscape is characterized by numerous smaller companies and private family businesses. Interestingly, according to Atomico and Crunchbase, the Italian venture capital industry is buried in “Rest of World” in its industry overview (grey bars = 1H22; blue bars = 2H22; yellow bars = 1Q23).
Naturally, these crosscurrents also have complicated fundraising by venture capital firms, which is meaningfully down across all geographies according to an analysis by Pitchbook (below). Fundraising in Europe declined from €28.0 billion by 261 funds in 2022 to €8.9 billion by 60 funds in 1H23. Average fund size increased from €107 million to €148 million, though, highlighting the continued concentration of capital in fewer investment firms which arguably is not healthy for the market and underscores the “risk-off” orientation of institutional investors now.
Data: Pitchbook; Chart: Erin Davis/Axios Visuals
There were two other, perhaps less notable, news items in the Italian press. Italy is now locked in effectively a two-way race with Saudi Arabia to host the World Expo 2030, a gathering of millions to showcase local innovations. While a winner will not be declared until November, allowing enough time for a secret balloting of 179 countries, such a victory may be catalyst for increased venture capital investments over the balance of this decade.
Additionally, while many people are trying to get to Italy, the Italians heralded the fact that the inaugural commercial Virgin Galactic space flight on June 29 was crewed by three Italian astronauts. What do they know about Italy that the rest of us don’t and why do they want to leave?
Revenge Space Tourism?
On the Flying Bridge 