PIR: an opportunity for growth of SMEs?

Following the example of other European countries, such as the UK [1] or France ^[2], the Italian regulator introduced in 2017 a new investment product, the “Piani Individuali di Risparmio” (Individual Saving Plans), or PIR.

The purpose of PIRs is to stimulate the growth of Italian enterprises and therefore the Italian economy, with a focus on a specific category of enterprises: Italian SMEs. This goal is pursued through the granting of significant fiscal benefits to those who invest in a PIR. PIRs have generated a lot of enthusiasm in Italy and a huge amount of money are being invested in them. According to last estimates, PIRs will collect around 13 billion Euros in 2017. This success generates new opportunities.

How PIRs work

A PIR is an investment format that can be chosen by an investor through different investment contractual tools, for instance a discretionary account, a security deposit account or a security of a PIR-compliant mutual fund. According to law n. 232 of 11 December of 2016, individual investors can invest up to Euro 30.000 in a PIR each year, and up to Euro 150.000 over five years. If the investment lasts for at least five years, the investor will avoid any tax on any gain deriving from the investment, such as capital gains or distributions (this exemption is applied also to inheritance taxes in case of death of the owner of a PIR). Therefore, due to the high level of taxation on capital gain in Italy (from 12.5% on State Bonds to 26% on shares, bonds, shares in mutual funds) the fiscal incentive makes PIRs a very appealing investment.

In this regard, PIRs are not “new”, as they follow the well-known model of the English ISAs and of the French PEAs. What makes PIRs a novelty is the provision of an additional restriction on the investment choice that must be fulfilled in order to access the fiscal benefit. In addition to the need to bind the investment for five years, a PIR must be invested for 70% of its assets in financial instruments issued by companies having their headquarters in Italy or in a European member state, provided, in the second case, that the company is permanently established in Italy. The 30% of this 70% must be invested in Italian Small and Medium Cap Companies, whose shares are not negotiated in the main Index of the Italian Stock Exchange (FTSE MIB) or in the equivalent Indexes of other countries. Consequently, only 30% of the overall amount can be invested free from any constraint.

A PIR cannot be invested for more than 10% of its assets in shares or bonds issued by one company or companies of the same group.

It is important to note that the management of a PIR can be active, thus financial instruments can be sold or reimbursed, provided that there is a reinvestment within 90 days that assures compliance to the above-mentioned restrictions. There is also a flexibility on the temporal side: restrictions must be fulfilled for 243 days a year. This flexibility softens the rigidity given by the restrictions on the allocation of assets.

This is a noticeable difference with PEAs and ISAs. In fact, PEAs provide for a tax exemption for 5-year investments with the condition that the 75% of assets are shares of companies with their headquarters in an EU member state (or, in the PMEs version, listed or non-listed SMEs with their headquarters in an EU member state).^[3] ISAs, on the contrary, in their basic version (indeed, there are ISAs structured for specific purposes) have no limits on the investible assets, being a tool for encouraging savings without caring about pushing investments towards a specific economic sector. PIRs share with PEA-PME a tendency to focus on mid-cap and small-cap companies, however with a strong focus on Italian companies.

PIRs are basically built as an alternative way to fund Italian Enterprises, especially SMEs, and this goal is achieved by setting limits to the possibility to diversify. PIRs are meant to solve one big problem of the Italian Industrial System, where there are many Small and Medium Enterprises, often family owned companies, with noticeable difficulties in raising capital and accessing capital markets. These SMEs have a limited possibility to attract new shareholders and managers which could contribute to the growth of the company bringing about new know-how and experience.

The intention to contribute to the development of specific sectors of the Italian economy was also shown by the fact that, in its first version, investments in Real Estate Firms were excluded from the fiscal benefits of the PIR: indeed, Real Estate is an economic sector where probably there is not an historical problem of underinvestment, as is the case for SMEs operating in other sectors.

Positive effects and risks

PIRs have grown significantly on the basis that the fiscal advantage is noticeable and the idea of investing in Italian enterprises, with the promise of high returns, is very appealing for Italian investors.

In this regard, it seems that the Italian regulator has achieved its goal. PIRs will effectively promote investment for the long term in Italian SMEs, channeling savings from Italian investors to “productive” investments and creating an alternative to financing from banks, which is not functioning as well as it could.

However, all that glitters is not gold. PIRs create a strong restriction: the assets must be invested for the most part in Italian small and mid-cap firms. For this reason, there are obvious limits to the possibility to diversify. This is a trade-off of the attempt to drive investments in a certain direction. Yet, the Italian financial market has a low capitalization compared to other European countries. Therefore, a noticeable capital flow is reaching a stock market with a limited amount of companies where it is possible to invest. This could raise the value of shares, leading to a share value disconnected from the economic fundamentals of firms, due to a difficulty in finding enough firms to invest in.^[4]

However, it must be also considered that IPOs in Italy are growing,^[5] also due to the recent introduction of an AIM market (2012) particularly suitable for SMEs. Many Small and Medium Enterprises in Italy plan to list their shares in this market. Therefore, a growth in the number of public companies, thus in the number of investment possibilities, could limit the mentioned risk deriving from the difficulty in finding enough company where allocating the resources of PIRs. This is also one of the reasons why the type of companies where it is possible to invest is being expanded to include real estate companies, that at first were excluded from the fiscal benefit. This choice could be criticized, but it creates a wider range of investible assets, contributing to limiting the risk.

There are not only risks for the functioning of financial markets, but also for investors. For instance, the risk that the tax exemption for capital gains, granted with the goal to stimulate a long-term investment and higher incomes for individual savers, might result in a huge benefit for the Italian financial industry as it tends to grab the financial benefits through higher commission costs.^[6] This higher commission cost can be justified by the fact that, in order to invest in small companies, often recently listed, it is necessary to have an in depth knowledge of the stock market.

Conclusions

Capital Markets of the European Union are undergoing reform promoted by the European Commission with the Action Plan on building a Capital Markets Union (CMU), launched in 2015 and amended in 2017.

The Capital Markets Union affirms that it is very important to provide European start-up and scale-up firms with risk finance by strengthening the existing tools or creating new ones for raising risk capital alongside bank credit. Creating a new channel through which individual savers can finance directly SMEs would answer this need. Moreover, by increasing the amount of money invested in the stock market, with a focus on small and mid-cap companies, PIRs create a strong incentive for SMEs to access capital markets, another goal of the Capital Markets Union. Eventually, an investment in PIRs, being stable for 5 years, satisfies also the need for more long-term financing, that is especially important for the growth of SMEs.

With the introduction of PIRs, the Italian market has finally a tool that makes it easier for small and medium Enterprises to raise funds, and that provides them with a strong incentive to enter the capital markets in order to have access to these funds.

The success of this financial tool depends also on its capacity to stimulate listing of Italian companies and on the ability of financial intermediaries to assess the real value of investments. PIR success depends also on the Italian and European regulators giving their contribution making easier for companies to access the capital markets, for instance establishing tax incentives for listing activities (something that is going to be – at least partially - done) and, in general, avoiding unnecessary and excessive regulatory barriers for listing. Helping companies to go public would be a fundamental complementary strategy to the introduction of PIRs and a key factor for granting their success. However, it is up to the Italian entrepreneurial class to seize the opportunity to enter the capital markets, improving family-run management and developing their business thanks to opportunities deriving from the listing.

Perhaps it would have been appropriate to allow for a wider diversification and to avoid such a steep slope from no-tax area to full-tax area at the fifth year of the investment. With a descending taxation depending on the duration of the investment, it could be possible to grant a more regular, rational and “disciplined” capital flow.

However, the need of possible adjustments should not detract from the fact that PIRs have satisfied the goal of granting a new alternative channel of financing for SMEs and might be a key factor for a faster and sound growth of the Italian economy.

This article is for information purposes only and is not intended as a professional opinion.

For further information, please contact Antonio Principato.

News e approfondimenti[1] Individual Savings Accounts (ISAs) were introduced in the United Kingdom in 1999. From 2013, also shares listed on the Alternative Investment Market of the London Stock Exchange are allowed in ISAs. This means that from 2013 it is possible for individual investors to invest in Small and Medium Enterprises.

News e approfondimenti[2] Plain Epargne d’Action (PEAs) were introduced in France in 1992. In 2014 there was the introduction of PEA – PME, where the assets, in order to have the fiscal benefit, must be invested mainly in European Small and Medium Enterprises.

News e approfondimenti[3] For a description of PEA-PMEs, see Olivier Dumas, PEA PME-ETI: an enhanced version of the French PEA of interest for EU asset managers, www.lexology.com.

News e approfondimenti[4] The noticeable impact of PIR on the value of shares is shown by the effect of the announcement that the government was going to propose the inclusion of investments in real-estate companies among PIR-compliant investments. As a consequence, there was immediately a noticeable growth in the value of shares of listed real-estate companies.

News e approfondimenti[5] Remondini, Ebhardt, Investors Can't Get Enough of Italian Assets, www.bloomberg.com.

News e approfondimenti[6] Zenti, Luci e ombre dei Piani Individuali di Risparmio: un successo a metà, www.finriskalert.it.