By Leonardo Faleri
I had the pleasure to interview Alberto Defazio, Bocconi alumnus and associate of Mandarin Capital Partners, an Italian Private Equity firm where, starting as an intern, he has been working since 2016. Founded by Alberto Forchielli in 2007, Mandarin Capital Partners is a Private Equity company headquartered in Milan with offices in Shanghai, Frankfurt and Luxembourg. Through its three funds, MCP has been investing in Italian mid-market enterprises, which, being mostly export driven, can enjoy growth opportunities in China and other foreign markets. The launching of its third fund, Mandarin Capital Partners III, was announced in August 2019. MCPIII has a fundraising target of €250 million to be reached in the first half of 2020. The previous fund, Mandarin Capital Partners II (2013), has already fully divested five out of its eight initial investments, returning an outstanding 39% IRR and over 2.2x MOC (Multiple On Capital). Since its inception in 2007, Mandarin Capital Partners has made eighteen investments, all of which being profitable.
Mr. Defazio, thanking you for accepting our invitation to this interview, could you please introduce your professional and academic background?
Talking about my academic past, I obtained a Bachelor degree in Business Administration at LUISS University, in Rome. After that, I studied Accounting, Financial Management and Control at Bocconi University, where I graduated in 2016. Moreover, in the second year of my MSc, I spent one semester at San Diego University in the United States.
Throughout my graduate studies I was able to do two internships: the first one at a fundraising company in the United States, and the second one at an advisory firm in China, where I had the chance to discover Mandarin Capital Partners, the Private Equity firm in which I currently work and that has an office in Shanghai as well.
In 2016, I started working as an intern at the Milan office of Mandarin, and, after a couple of years as an analyst, I recently became an associate.
How does Mandarin Capital Partners differentiate itself from other Italian private equity funds?
First of all, I believe that Mandarin, different from the majority of Italian PE funds, enjoys a higher degree of internationalization, as the company has a strong presence in Asia through its Shanghai office. The Chinese team of Mandarin plays a key role in helping portfolio companies to develop and grow in Asian markets. This certainly represents an opportunity for Italian export driven companies willing to receive capital from PE funds, as entrepreneurs recognize Mandarin’s knowledge of the complex Chinese market, something crucial for companies relying on a large consumer base, like the ones in the cosmetics or food industries.
Secondly, among all private equity funds established in Milan, Mandarin is clearly among those with the younger work force, something that can certainly be considered as a competitive advantage. Moreover, this allowed me to be vested with responsibilities that analysts and associates of other Italian PE funds may not be entitled to. In particular, I believe that junior members of Mandarin, working alongside the fund’s partners, enjoy a great level of exposure with entrepreneurs and managers of portfolio companies. While in private equity there are often three team members which follow an investment opportunity (the managing partner, the investment manager and a more junior figure), in Mandarin, where there is no investment manager figure, associates are more directly involved in the various deals.
How does MCP select its target companies?
We are a generalist fund, as we are interested in companies in any sector (excluding real estate), specifically in industrials and consumer goods. Mainly, we select our target companies through our network of consultants, boutique advisory firms that present us a pool of companies willing to receive equity capital. In the pre-investment phase, relying on these types of consultants is something extremely beneficial for Mandarin, as they allow a great level of flexibility concerning the screening and bidding process.
If we instead relied on major international advisory firms to present us the potential deals, we would have to follow a predetermined framework of action. Moreover, bigger international advisors usually introduce the potential target companies to a large number of funds, which therefore compete against each other to make winning bids, a competition that drives up the multiples that funds will eventually pay for their targets. Furthermore, the boutique advisory firms that work with us make sure that we can establish a one to one relationship with the entrepreneurs, which instead would be met only in the management presentation phase if we relied on those bigger advisors. Thus, this choice allows us to pay lower multiples, due to the reduced competition with other funds, and to create a closer relationship with the targets before the investments are made.
What is the fund’s target IRR?
Considering that this metric depends on multiple factors inherent to every single deal, usually our target IRR is 25%. Specifically, in our second fund (MCPII) we were capable to exit relatively quickly from our portfolio companies, something that resulted in IRRs even above 25%.
What is your opinion on the fact that, in recent years, thanks to a steady increase in AUM, we are witnessing higher valuations in the private market? How can a PE fund find good targets with the consequent growth in multiples?
In Italy, the growth in private equity activity that we have experienced in the last years has definitely increased the multiples. Therefore, in order not to incur in the risk of overpaying we have decided to focus on smaller targets, which are contended by a lower number of PE funds, as a low competition allows us to pay reasonable multiples. Moreover, targeting companies with a relatively lower EV, can enable us, instead of doing few bigger investments, to make a higher number of transactions, as we have done in the frozen food sector in 2018. By investing in both Appetais SpA and AR Srl (A JV of Appetais and Roncadin), instead of a single bigger player valued at double digit EBITDA multiples (commonly observed in the food sector), we could pay single digit multiples for the two companies, before putting them together under the newly incorporated IFFH – Italian Frozen Food Holding SpA, which, from December 2019, includes also Alcass SpA, Mandarin’s most recent investment, the frozen food company owner of the Amica Natura brand.
What role could Mandarin play for the high number of small and medium enterprises in Italy that often are family businesses?
The Italian market is definitely characterized by many SMEs. Moreover, few of these companies have already been invested by private equity funds, unlike what happens in other European countries. As a result, while Italy is one of the markets with the highest number of primary deals every year, in countries like Germany, with a more mature private equity presence, it is rare to invest in a company without a PE investor among its shareholders.
Secondly, generational succession is clearly an issue for Italian enterprises, since a great percentage of these are still owned by their aging entrepreneurs. Under these circumstances, private equity could ensure a proper succession for these companies, contributing, therefore, value creation in these types of family businesses. From our perspective, since a couple of years ago, Mandarin sponsors an initiative called “Di Padre in Figlio” [From Father to Son], which awards the best generational transfer of the year among Italian family businesses. This initiative enables us to network with the companies attending the event, something that could lead to potential future business relationships.
What do you enjoy the most about working for Mandarin Capital Partners?
Because Mandarin is smaller than major international private equity players, an enthusiastic team is a key factor in order to perform successful deals. Moreover, the high degree of exposure that I previously touched on, makes the job extremely interesting. I find the possibility of having close relationship with entrepreneurs and their companies something very stimulating, as this has allowed me to experience different cultures all around the country.
What advice would you give to the many students willing to pursue a career in private equity?
I believe that a key aspect that a student with this willingness should clarify itself, is understanding in which “type of private equity” he or she would like to work in the future. If your objective is to work for a major international private equity firm, a couple of years as an analyst in M&A or in investment banking could be a great starting point for this goal to materialize. On the other hand, if you enjoy more the idea of working for a smaller fund with a great territorial and entrepreneurial exposure, like Mandarin Capital Partners, a good starting point could be an experience in a boutique M&A company focused on the small cap and mid-market like GCA Altium, an internationally renowned firm, or Vitale & Associati, more Italy-oriented. Under the latter scenario, besides a strong background in finance and accounting, a good degree of knowledge in business administration could be useful to deal with entrepreneurs and management teams of SMEs.
I would like to highlight that, like many BSPEC members, you studied Accounting, Financial Management & Control at Bocconi. How did graduating in AFC help you in your career?
Having studied AFC has definitely helped me throughout my career. Lying between finance and management, and thus mostly focused on corporate finance, AFC is an ideal course for someone willing to pursue a career in private equity. Moreover, thanks to its practical teaching approach, focused on group-work and projects, and to the fact that an internship is a requirement for graduation, Bocconi can give its students great tools in order to succeed in the job market. In my opinion, students should take advantage of these opportunities provided: for example, do not neglect the choice concerning the internship, and avoid doing it “just for the credits”, instead, try to orient it towards your future career goals. Secondly, I also strongly suggest doing an abroad experience. The many exchange programs that Bocconi offers can give you the possibility to experience a completely different academic system, thus opening your mind, and creating foreign professional networks – something very useful for your future career. On the other hand, if, for any reason, it would not be possible to do an abroad experience, I recommend taking the private equity elective, which could provide Bocconi students with a passion in PE and a strong theoretical background on the topic.
Thanks for your time and insight!
Editor: Eric Peghini
Author: Leonardo Faleri