By Francesco Defila
At the beginning of this academic year we had the pleasure to interview Edoardo Lanzavecchia. Since 2007, he has been a senior partner at Alpha, a pan-European mid-cap private equity firm with €2 billions under management. He is considered one of the veterans of the Italian Private Equity industry. In 1998 he founded and was head of The Carlyle Group in Italy, and then also founded Magenta SGR.
Good afternoon and thank you so much for accepting our invitation for this “Coffee Break with”, Mr. Lanzavecchia. Would you like to introduce yourself with a brief overview of your professional and academic background?
I am a nuclear engineer from Politecnico di Milano, where I graduated in 1984. At that time there was only the long one and not the short one – unfortunately I had to do all the 5 years to get to the graduation. Once left the university, I started working as a researcher in the plasma physics lab at CNR (Centro Nazionale Ricerche). Then, after the military service, I went to ABB, first in Milan and then in Zurich, in the Commercial and International Department. Thanks to ABB, I did my MBA at SDA Bocconi. After that, I worked as a Strategic Consultant at MAC Group, a Harvard-based strategy consultancy firm (bought by Capgemini), where I served for a couple of years. Then, I started my Private Equity career at SOPAF, which was a leading Private Equity, although at that time Private Equity didn’t exist, but it was called commercial bank. So, I started there doing majority investments, I performed well for 6 years – very good investments, very good returns -, and that’s why Carlyle hired me together with a French and a German colleague to start the buyout fund in Europe. I stayed 8 years in Carlyle, and after that I did my own fund (Magenta SGR), which, to make a long story short, merged to Alpha after a couple of years, and since then I am here with this group.
Yet from your studies it appears that you initially did not think you would end up in PE. So, from where and how did you eventually grow interest for PE?
It was just a matter of luck, in the sense that I didn’t know what Private Equity was. During my MBA I developed a strong interest for understanding businesses and finance, so the Strategy Consultancy experience was for me the logical continuation of the MBA to get analytics tools to understand businesses and then I was lucky enough that Jody Vender, founder of SOPAF and the pioneer of Private Equity in Italy, loved engineers with an MBA and a consultancy background. So, a headhunter identified me, the first meeting went well and I was hired.
You had the chance to work in both international and Italian funds. Were there any evident differences between the two?
In any case you have to do good deals. However, nowadays being Pan-European or even better global, despite the difficulties to manage a larger firm, is the right thing to do. When I started up my own fund in 2005, one of the first things that I did was to sign a strategic alliance with Alpha, because I immediately wanted to become Pan-European at least. Moreover, since when I started, I have invested in businesses with a global reach. Indeed, the first deal that I did was CIFA, which at that time was pretty much European with some activities in US. At the end of the day, being only Italian has some limitations. As you invest in global businesses, you have to be global also as a firm. We also have global investors, who help us in having a global reach. Being Italian is great, but I doubt is sustainable in the long run.
As regard to the activity you perform at Alpha, how would you describe your role in the firm? In particular, which are your day-to-day tasks and which one do you enjoy the most?
There is a part of my job which is of course managing the firm and all the aspects related to it, but certainly most of my job is to chase and negotiate deals, and, most importantly, spending time on portfolio companies. The time you spend on the portfolio companies to drive the returns up by facilitating the implementation of your investment thesis is the way to realize the capital gains of your fund in that investment. So, I would say 20% of my time is spent in the management of the firm, 30% in generating deals and 50% in portfolio companies.
How does Alpha stand out from the rest of the funds?
First of all, the returns that are pretty good, which consistently makes Alpha a top quartile fund in Europe since many years. Secondly, we are local, which means that we have real offices all around Europe, with partners who generate and execute transactions, as opposite to sit all in London and fly over to Milan, for instance. Thirdly, as regard to our culture, our focus is on family businesses. That’s a key point. Here in Italy, all the portfolio is composed by companies that were bought from families, where they are still co-investors with a minority position aside us. This strategy has been extremely successful in the past and I believe also in the future.
Throughout your career, is there any remarkable deal that you believe contributed to your personal and professional growth?
Frankly, the deal that I learned the most was the first, because you are discovering a new world. But every deal is a new story, new aspects, new avenues to capital gains, new difficulties in negotiating the contract, … Experience in this job is key: every time you do deals, you are literally going to learn something more. The more you do, the more intense you work on them, the more you become a wise and successful investor, as long as you do not become arrogant.
There are three main drivers for value creation – performance arbitrage, financial arbitrage and arbitrage on multiples. In your experience, which one has been the most important element?
In periods like this, where multiples are expanding and I believe that probably we have reached the peak, you might enjoy multiple expansion, but can definitely go the other way around. I have already gone through a couple of big crises, and those experiences taught me that in your investment thesis you have to take it into account. In the deals that we are doing today if we do not factor even a strong decline in performance, particularly in cyclical assets, we are not telling ourselves the truth, because it shall happen. Then, operational improvement is absolutely a must, because with a flat business, in which after 5 years the EBITDA is still the same, I doubt that even in a multiple expansion period you can enjoy a multiple expansion. Instead, financial arbitrage does not exist, in the sense it does not create value. Leverage simply amplifies returns but does not create returns per se. Therefore, the only way to do is to focus on operational improvement. You cannot predict multiple expansion, but you can work on operational improvement.
With a market characterized by high prices and intense competition, investors have to be smarter about where and how to dig. How do you source your ideas?
You source your ideas in the same way. You don’t change your way to source to generate transactions. It’s difficult to simplify it, it’s a combination of things: your contacts, your ideas, your discussions, sometimes just luck. Personally, at the moment I look for counter-cyclical or a-cyclical businesses, but, in general, you have to orientate your hunt to something that can create capital gains in the 5 years forward.
As suggested by the last Bain report on Private Equity, longer holding period are nowadays the “new normal”. How does this impact the way you conduct your business?
This is something that is happening and we are actually doing it – owning Caffitaly for 5 years and now doing another ride that will last another 5, 6, 7 years. That is simply the fact that you realize that once you have a jewel, you want to keep it. It’s good to invest in something that you already know, that is doing well and you think it can do even better going forward, rather than take all the risks of a new transaction. However, we must comply with our rules. There are many ways to do this, and I expect we will see it more and more, probably with multiple structures to satisfy the investors’ needs.
With respect to Italy, what is your view about the Private Equity industry? Looking back to the past, how has the situation changed? How do you think it will develop in the next years?
Private Equity is here to stay and to grow. No doubt. The size of the Private Equity compared to the size of the Public Equity, which is also underpenetrated in Italy, is a dwarf. I don’t know how many years it will take, but it will double, triples, quadruples the size of the market, which is good for the economy. In terms of competition, I see more and more other types of investors, like SPACs or Family Offices, that get together, organize themselves and try to do deals, but also some LPs coming down and build their own practice. However, it’s also fair to say that there is a clear path to consolidation. You see all the names getting bigger, stronger, more structured, with operating managers, fund raising teams, and big compliance offices. Consolidation is inevitable and under way, so we will see more Private Equity, but not a big increase in terms of the number of subjects working in the industry. Hopefully. It’s good for us.
What kind of investor are you? How would you describe your relationship with the management of the portfolio companies and with the other shareholders?
We are pretty much active investors. First of all, we are majority investors. So, we’re the owners of our portfolio companies, with all the obligations that this entails, including from time to time the decision to have a new manager, if you think that the current manager doesn’t perform as he/she should. The relationship with the management is continuous and strong. We work together with respect to the two different jobs. We’re professional investors, they are professional managers and each of the two does his job within his boundaries, so we don’t pretend to manage, and they don’t pretend to own. Clear roles, discipline. That’s the description of our relationship with the management. As regard to the relationship with the families, it’s the same. Most of the time the two roles are personified by the same person. If you do a deal with Andrea Cavagnis, who used to be the owner of Pavan and he is the CEO. But we know the distinction between shareholder and owner, so when we talk to him as a CEO, we talk to him as a CEO, and when we talk to him as a shareholder, we talk to him as a partner. In that case, the relationship is even more intense.
What advice would you give to our readers wanting to pursue a career in Private Equity?
I strongly recommend pursuing a career in Private Equity, because I think it is the best job in the world. It’s a great job. I had a lot of fun when I started and I still enjoy. So, I strongly recommend doing that and to try to pursue with persistence, stubbornly. Certainly, you need to have a good background. I think that there is no precise rule, because at least in my experience we have hired from different disciplines. Academic credentials are important, but so is the fact that you have achieved something beyond your studies in a different sport, art, whatever you want, because it means that you have been an entrepreneur once in your life. This is a very distinctive point.
Interviewer: Francesco Defila