What does it mean to invest in the real economy?

We hear more and more about involving private savings in the broader panorama of economic growth, channelling Italian deposits into investment instruments aimed at supporting the growth process of innovative small and medium-sized enterprises.

All these activities fall under the broad umbrella of investment in the real economy.

This is a concept that is relatively new to the general public but which in reality has a rather long history, even in Italy. Until not so long ago, in fact, investments in the real economy were activities that involved only private equity and venture capital funds. The Covid-19 pandemic, however, has lifted the veil on a double structural problem in our country: the difficulty of access to credit for many companies and the high amount of blocked deposits on the current accounts of our compatriots.

Bringing these two worlds together seemed from the outset to be the ideal solution for guiding recovery after one of the worst economic and dramatic crises since the Second World War. For this reason, more and more investment solutions in the real economy have been emerging recently that also aim to involve retail investors. 

It is therefore clear that today it is essential to understand what investing in the real economy means and why it may be important to do so.

The real economy is the part of the economy that includes all businesses that produce goods and services and distribute them on the market. The real economy thus includes enterprises, the goods they produce, land, real estate, equipment and all other goods related to production, as well as service providers. Within the real economy, enterprises seek resources to make their own productive investments in equipment, technology and human resources.

Unlike the real economy, the financial economy comprises all financial elements and products such as shares, bonds, government securities, liquidity instruments, etc. Financial markets provide the real economy with resources that will be used for investment in business and/or production of goods and services.

Financial markets provide the real economy with resources that will be used for investment in business activities and/or the production of goods and services. These resources will then return to the financial economy through the repayment of the capital lent and the payment of interest.

In this way, the real economy obtains the support it needs to create value and innovation, while finance obtains the return it seeks, consisting of the interest on loans.

An example of real economy investment solutions are ELTIFs.

These are in fact a category of products created in 2015 at the initiative of the European Union and introduced in Italy in 2018. Their appellation stands for European Long-Term Investment Funds.

ELTIFs are by their nature closed-end funds that make investments in financial instruments of small and medium-sized unlisted European companies, in listed companies with low market capitalisation but also, more generally, in assets of the real economy (for example, in infrastructure projects).

For clients, the advantage of real economy investment solutions is threefold:

1. these investments make it possible to allocate a portion of the portfolio to instruments that are more decoupled from the performance of the financial markets, thereby raising the level of diversification and keeping away from the volatility that will characterise stock markets in the coming months in the wake of the uncertainties of a complicated economic recovery.
2. instruments of this type make it possible to take advantage of the illiquidity premium to capture higher average returns, especially in the bond market.
3. they benefit from attractive tax advantages that can provide additional leverage for certain types of investment portfolios.

Banca Generali was one of the first Italian financial institutions to launch a real project to support the real economy through dedicated investment solutions. In June 2020, BG4Real was launched, a programme dedicated to investment solutions and instruments oriented towards the real economy through a range of dedicated services and innovative products. To date, the BG4Real project has two dedicated instruments that aim to create a real bridge between the needs of households for stability and the search for long-term value and the growing demand for credit and private capital from companies and the economic system.

• 8A+Real Innovation: this is an alternative investment fund (AIF) developed in collaboration with the independent boutique 8A+ Sgr. The fund is an innovative multiasset created to invest in both debt instruments (70%), selected with the advice of top-level partners including start-up incubators and venture capital funds, and in equity (around 30%), where the best opportunities are sought among the portfolios of private equity funds and direct operations on the most innovative SMEs, with a particular focus on Italy.
• 8A+ Real Eltif Italy: along the same lines as Fia, Banca Generali's first Eltif (8A+ Real Eltif Italy) is characterised by an equally prudent approach that combines the concept of protection and de-correlation from markets with support for Italian companies. The debt component, which here rises to 80%, looks mainly at the Italian SME financing sector, the world of minibonds, European real estate and senior secured loans. The equity focus, on the other hand, concerns direct loans to Italian scale-ups and companies listed on the Aim stock exchange.

These instruments have been accompanied by the Bank's innovative selection ecosystem which, through international partnerships, analyses and finds the best investment opportunities in the market for innovative and scale-up SMEs. Since the start of the project, BG4Real has supported the development process of companies such as Treedom, Inxpect, Datrix, Webidoo and many others.