Italy's family-owned companies are being forced to woo private equity as the banks they have long relied on shut off credit.

Corporate Italy is largely made up of small and medium-sized family-owned enterprises, many of whom have traditionally preferred bank credit to grow their businesses because of reluctance to admit outside influences.

However Europe's debt crisis has revealed Italy's banks to be among the weakest in Europe and the likes of UniCredit have had to overhaul lending arrangements, slashing credit lines as they seek to boost their own capital levels.

As a result Italian companies, which rely on short-term debt more than elsewhere in Europe, are being forced to rethink their business models in a major cultural shift.

The fact that banks are very reluctant to free resources means that a lot of companies will start to look at private equity out of necessity, said Mauro Moretti, partner at London-based private equity firm Hutton Collins.

The potential rewards were dramatically highlighted on Monday by news that Investindustrial, the Italian private equity firm which owns luxury motorbike brand Ducati, is looking to sell it for up to 1 billion pounds ($1.6 billion), three times its initial investment in 2005.

The Ducati deal demonstrates that there are great opportunities for private equity deals in Italy that have often been overlooked, said Fabio Lorenzo Sattin, chairman and founding partner of Milan-based private equity firm Private Equity Partners SgR SpA.

The time to invest in private equity is now.

BLOODY NOSES

There is unlikely to be a scramble from the rest of the world however: the global buyout giants that flocked to Italy in the boom years have pulled back after receiving bloody noses on deals like luxury yacht maker Ferretti.

Ferretti was saddled with 1.2 billion euros of debt in 2007 after its leveraged buyout by Candover , then defaulted on payments as it suffered in the economic downturn. Candover not only lost its investment but went out of business itself.

There has been a huge retrenchment out of Italy and that's as a function of not being able to do successful deals, a banker who advises private equity firms on deals said.

After peaking in 2008 at $13.5 billion (8.5 billion pounds), total private equity investment in Italy fell to reach a provisional $1.5 billion in 2011, according to Thomson Reuters data, reflecting a shift to smaller deals.

Arle, the firm that has risen from the ashes of Candover, now focuses on Northern Europe. Others including 3i Group and BC Partners have trimmed staff in Italy over time, while Vestar shut its office in Milan last year.

Their reluctance stems from traditionally high prices set for Italian firms where founders are often unwilling to negotiate, and arguments over the size of stakeholdings, with family owners adamant about retaining control.

Sources with knowledge of the talks say both these issues have created serious sticking points in the current negotiations between Italy's Rovati family, which is seeking a buyer for a stake in its pharmaceutical company Rottapharm, and private equity funds unable to find room for negotiation in the 2 billion-euro price tag and the non-control stake on offer.

LOCAL INTEREST

The high interest rates that are hurting businesses are also complicating investors' ability to find funding for mega-deals.

Average interest rates on loans over 1 million euros to Italian businesses rose to about 3.8 percent in December, a 65 percent rise from the 2.3 percent in January before the credit crisis struck, the latest Bank of Italy data showed.

But for the main players in this latest trend, Italian buyout houses and those willing to take minority stakes and work with family owners, this is not a major hurdle.

The market has changed. The lack of debt financing complicates large deals ... but makes it easier to invest in minorities with precise exit strategies, said Alessandro Grimaldi, senior partner at Clessidra, the biggest Italian private equity fund.

Demonstrating this approach Clessidra's latest investments are mid-sized confectionery company Balconi and Euticals, a pharmaceutical ingredients company with sales of some 50 million euros, in which it is finalising its investment.

The government's 1.2 billion-euro fund Fondo Italiano d'Investimento has become a prominent presence lately too as it is prepared to accept lower returns than the 20-30 percent private equity firms target, and will invest for longer than private equity's normal 5-year window.

Since mid-December, the fund has made ten investments in companies ranging from Rigoni di Asiago, a 90-year-old producer of organic food, to baggage wrapping company TrueStar Group.

CULTURAL SHIFT

The slow economy and tighter bank credit are thawing the traditional reluctance of tightly-held family firms to consider lower prices, said Clessidra's Grimaldi, while others are now contemplating selling a portion of their company to an external investor in the hope of a getting a fuller price for it at a later stage.

Vincenzo Boccia, President of small and medium enterprises at Italy's business lobby Confindustria, said many business owners were starting to see institutional investors as less of a threat and more of value for the expertise they can bring as companies struggle to grow in tough economic times.

There is a new attention towards private equity where opportunity brings cultural change, said Boccia, who is also CEO of a printing firm founded by his father sixty years ago.

That change is also being wrought by a new generation of business leaders, said Sattin at Private Equity Partners.

The younger generation is more accepting of private equity and so is willing to consider it when they inherit the family firm, he said.

($1 = 0.7545 euros)

(Additional reporting by Jennifer Clark; Editing by Sophie Walker)