Discussion Paper on alternative financing for SMEs through a private credit fund. Opportunity for an Asset Manager to diversify in alternative investment funds leveraging spread on Italian SMEs and households credit facilities.

1. 1
Excerpt from the Discussion paper
Milan, May 2019
Specialty Financing Private Debt
Fund (SFPDF): «Extracting yield in a
low interest rate environment,
while financing the Italian SMEs»

2. 2
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
Content
• Executive summary
• Market context
• The solution: Specialty Financing Private Credit Fund
• Next steps

3. 3
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
1. In the Eurozone lower interest rates and growth are expected along with a
liquidity support by the ECB
Source ECB
Macroeconomic projections
Interests rate
unchanged for the
entire 2019 (main 0%;
deposits 40bps;
refinancing -25bps)
New TLTRO
announced starting
from Q3-2019 till Q1-
2021
In order to reach an
inflation close to 2%
Recent ECB announcements
Source Press

4. 4
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
3. The Italian banking system is still under pressure…
Some major new regulations/trend
IFRS9
ECB NPLs
guidance and
addendum
Basel 4
 Adoption of staging and lifetime PD (bucket 2/3) 
increase of provisioning for high risk performing loans
 Provisioning growth of about 15-30%; 100-250 bps
impact on CET1
 First time adoption (FTA) facility 1st year (impact on
P/L neutralized); non linear dilution regulatory capital
impact over 5 year
 Specific structured governance and processes for
NPLs
 Unsecured provisioning 100% within 2yrs for new
loans
 Secured provisioning 100% within 7yrs for new loans
 From 2022
 Output floor @72,5% for AIRB; phased in five years
(50% 2022)
 Simplification of operating risk calculation
More provisioning + More Capital + More cost of funding = Less Return on Capital
Percentage; Source Bank of Italy
Scenario 0: business plan targets achieved – 9%
ROE at most
Scenario 1: 50% achievement – 7% ROE
Scenario 2: C/I stable; Cost of risk >
expectations; ROE 3%
Probably below cost of
capital in every
scenario
Significant Institutions expected ROE
Funding cost
increase
 The increase of Italian spread (ca 250 bps), TLTRO
Substitution (150 Bn within 2020 – new facility
expected), the book maturity mismatch, will increase
the cost of funding with important impact on the
refinancing

5. 5
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
5. … credit crunch is emerging especially for SMEs, while households are
increasing leverage
Loans to the private sector – growth rate (%)
YoY Change
QoQ Change seasonally adjusted
 Private Sector
 Households
 house purchase
 consumer lending and other
 Non financial enterprises
 Services
 Manufacturing
 Building and Construction
1,1
2,6
2,5
2,7
-0,1
1,1
0,8
-3,5
Feb 19 YoY
Interest rates on new loans for
enterprises (%)
< 1 Mn €> 1Mn € C/A Loans
Decay Rate
House
holds
Enterpr. Total
Source: Bank of Italy – Bulletin 2019

6. 6
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
8. … but SMEs are definitely in better shape…
Revenues
Growth
Value
added
Growth
EBITDA
growth
ROE
Financial
Debt/
Equity (%)
Financial
Debt/
EBITDA
Interests/
EBITDA
(%)
Very low risk
Low risk
Medium risk
High risk
Key performance drivers # SMEs and YoY Growth
Financial Health Risk Profile
Source: CERVED PMI report 2018

7. 7
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
10. In the Italian Market there are many lines of credit with interesting risk-
reward ratio
Type of credit
(size)
Bankit APR (bps;
march 19)
Risk Growth
SIMPLIFIED
 Overdraft (>5K)
Accounts receivable/
payable financing
Factoring
Consumer lending
Real Estate Leasing
Equipment Leasing
Mortgage Loan
Salary and pension
backed
840
706 (<50K €)
503 (<200K)
301 (>200K)
501 (<50K)
310 (>50K)
964
396
811 (<25K)
463 (>25)
261
824 (>15K)
Very High
High/medium
Medium/Low
Medium/High
Medium/High
Medium/
Medium
Low
Low/negative
Low/negative
Medium
Medium/High
Medium
Medium/High
Low
Medium
Secured
No
No
Yes often with a
commercial credit
insurance
No
Yes – Asset Owned
Yes – Asset Owned
Yes – mortgage
Yes – CPI
insurance

8. 8
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
13. Alternative financing to SMEs has just started and is under development
Source: Politecnico di Milano “la finanza alternative per le PMI”; minibondItaly.it
Mini Bond
(1Q19)
Main Features
Considering short/MLT debt of size <50 M
€ issued by non listed companies: 2,1 Bn,
297 bonds outstanding with Avg ticket 7 M
€
 Avg Maturity 5 yrs; Avg Interest rate 5%
18% partially secured
Average Turnover of the issuer 87 M €
297 outstanding issues ow 58% related to
enterprises with less than 50 M turnover
Crowdfunding
(17 - 1H18)
Reward based crowdfunding (project seed
– kickstarter, Indiegogo) – 7 M €
 Equity crowdfunding: 134 initiatives for ca
33 M €
 Lending crowdfunding supported by credit
funds: 60 M
Invoice trading
(1H18)
612 M € through platforms
Different business model: market place,
purchase leveraging funding from
securitization, supply chain finance
 Credimi, Workinvoice and Factor@work
main players
Direct lending
(1H18)
Till 2016 used to substitute bank loan
Big ticket
Undisclosed, 25 transaction monitored for
311 M €; many funds just started:
SCF Groupama
Muznich – Springrowth SGR
Fondo Colombo linked to Borsa del Credito
Fondo Italiano di Investimento PD Fund of
Funds (400 Mn)
1-1,5 Bn € to SMEs

9. 9
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
14. Alternative credit funds have been regulated only recently by Bank of Italy
• Credit Funds introduced in 2014 with an amendment of TUF by allowing collecting investment organism to grant loans
out of the funds collected or (origination funds) in addition to loans granted by third parties (participation funds)
• The full Regulatory framework has been completed only recently with the amendments of TUB to avoid misalignments
• These funds can be available both for Retail and Professional Investors
• Bank of Italy issued provisions setting out the prudential regulation of credit funds, in order to introduce a set of
provisions so as to reduce the risk of shadow banking
Bank of Italy provisions on credit funds
Closed-End
Structure
Leverage and
Maturity
requirements
 The regulation requires that credit funds
are established as ‘closed-end structures’:
investors’ redemption of units or shares is
not allowed before the end of a fund’s life
in order to prevent maturity and liquidity
transformation
 Credit funds marketed to retail customers
are subject to a leverage limit of 130%;
 Those marketed to professional investors
are subject to a leverage limit of 150%.
 Furthermore, credit funds can enter into
derivative contracts exclusively for hedging
purposes (limits on leverage).
 The maturity of the credit granted by a fund
cannot exceed the maturity of the fund
itself
Processes and
procedures
Concentration
limit
 As far as internal controls are concerned,
asset managers are required to define,
within the risk management system, a
specific process for credit risk
management, with particular regard to i)
risk measurement ii) risk diversification iii)
credit monitoring iv) classification of risk
positions and v) assessment and
management of impaired loans (risk
management)
 Both retail and professional credit funds
shall limit the exposure to a single client at
10 per cent of the total assets of the fund.

10. 10
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
19. Private debt conundrum: many issues to be addressed, but the market is
moving forward
Regulator
 With CMU Action Plan, EU intends to favor
SMEs financing
 Recently announced measures to reduce
capital requirements for insurers which invest in
private equity/debts (delegated regulation
8/3/19 on Solvency II)
 EBA clarifications on high risk exposures would
reduce capital requirements for certain AIF
Institutional
Investors
 More eager to invest in private debt and equity
in pretty well-diversified fund
 Insurers will be facilitated to focus on by
Regulations adjustment
 Long term secured yield very complex in a low
interest rate environment
Banks
 Need to release capital to face the phase-in
impact in low interest rate environment
 Access to more diversified portfolio thanks to
multi-originator funds
 Capital impact will be progressively reduced
Asset Manager
- Credit Funds
 Many not accustomed with AI logic
 Not able to originate very diversified portfolio
(i.e. concentration risk)
 Tends to adopt an “investment banking
approach”
Family office /
Professional
Investors
 Looking for more yields but exposed to
highly risk and concentrated private
investments
Credit
Intermediaries
(106) / Fintech
 Looking for funding to originate new
business
 No access to interbanking facilities
 Exposed to spread volatility
Enterprises
 Looking to diversify source of funding
to have better accessibility and
conditions
 Need of quicker responses
Brokers
(mediatori)
 Need to enlarge provider base
 Need of having quicker responses
Cassa Depositi
e Prestiti
 Aimed at enlarging the support to Italian
SMEs
 Already involved through a fund of
funds vehicle managed by Fondo
Italiano di Investimenti

11. 11
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
Content
• Executive summary
• Market context
• The solution: Specialty Financing Private Credit Fund
• Next steps

12. 12
LM Advisory
lodovico.mazzolin@outlook.com
Specialty Financing
Private Credit Fund
(SFPCF)
20. The solution: “Specialty Financing Private Debt Fund - SFPDF”
Asset Manager
Specialty
Financing
Private Debt
Fund
SFPDF
AIF
SFDF
Advisory Gen.
Partner
Investors
 Insurance Companies
 Pension Funds
 Sovereign Funds
 Family Office
 Professional Investors
 Banks
 …
Anchor
Investors/Guarantors
 CDP
 EIF
 …
Servicers
Custodian
Originators
 Banks
 Brokers
 106 – Specialty
financing players
 Single Enterprises
 Large Enterprises for
SCF agreement
Guarantors
 Fondo Centrale di
Garanzia - MCC
 SACE – Other commercial
credit Insurance
 Consortium/Regional
Funds
 Single loans
 Portfolios
 Securitiziation
notes*
 Mini Bond Annual Yield
 Principal @
maturity or max
10% yearly
according to
liquidity
 Management of
the fund,
servicers and
originators
 Management of Loans
 Custodian Services
 Support the seeding
and possible
preference on
liquidation
 Secure as
usual loans
 Fund set up
 Capital raising and relationship with
investors
 Risk and compliance management
Info providers
Rating agency
 Supply of info
and
rating/scorings