Disclaimer: This interview was conducted on 05/04/2023 and the views conveyed in the article reflect the environment at the time of interview
On behalf of BSPEC, I would like to thank you for accepting our invitation to this “Coffee Break.” Could you please tell us more about your academic and professional background and how you came to work at Bain?
I ended up working for Bain & Company following a slightly different path compared to the most common one, which is typical of young graduates directly joining this organization as Associate Consultants upon the completion of their studies.
I obtained my Bachelor’s and Master’s degrees in Management from the University of Padua and I started my professional career at GlaxoSmithKline, where I spent several years. Subsequently, I obtained an MBA at INSEAD and, afterwards, I joined Bain & Company as a Consultant.
With regard to the activities you perform at Bain, how would you describe your role in the Private Equity (PE) Practice? Can you tell us about the services offered by Bain PEG to PE funds?
As a Partner in the Private Equity Practice, my job mostly consists of assisting PE funds in assessing investment opportunities in the commercial due diligence phase. Consequently, as business advisors, we enter at a fairly late stage of the M&A process, when the funds have typically already decided whether to invest or not in a certain company.
There are different types of due diligence: some are quick to validate the investment thesis, while others are more detailed and take longer time to be completed.
This is one of the aspects that has changed the most over the years because projects are getting shorter and shorter, and with the increasing number of deals in the industry (see the record levels of PE-led deals in 2021 and 2022), deadlines have become tighter and tighter.
Bain has also addressed this issue by using digital tools that enable more detailed analysis and has recently announced a global services alliance with OpenAI to further develop its capabilities and maximize business potential all around the world.
Throughout your career, how many deals did you participate in? Is there any remarkable deal you have worked on that has contributed to both your professional and personal growth?
Since joining Bain & Company I have had the opportunity to work on a large number of deals, across the US, Europe, and Italy, thus maturating an extensive experience in advising investors across multiple industries, in particular in the fashion and luxury sectors across the value chain as well as in retail, consumer products, and healthcare.
Amongst the most relevant deals I have worked on, I recall Dainese, Biofarma, and Golden Goose, among the recent transactions.
As a Partner in the Private Equity Group, during my career I have worked alongside both Large Cap and Mid Cap PE funds, and I think this has been very engaging since I had the opportunity to see a wide variety of transactions of different sizes. Indeed, while on the one hand, large deals are often more complex and transformational, on the other hand, mid-market deals account for a significant percentage of the Italian market.
Recent macroeconomic developments lead many people to believe that there is a recession around the corner. What is your view on the situation, and have you seen evidence of this in the deals you have worked on recently?
I believe that the current scenario is characterized by high uncertainty, resulting from a complex macroeconomic environment due to high inflation coupled with the consequent restrictive monetary policies implemented by central banks that have led to an increase in interest rates. However, at the moment there is no clear evidence of the recessionary phenomenon and its timing.
This translates into an even higher level of uncertainty, which in turn makes the current state of affairs even worse, as many PE funds believe that, given the macroeconomic pressures, it is not the “right” time to monetize their investments, which is the reason why we have noticed a sharp slowdown in market activity, especially in cyclical sectors such as consumers products and retail.
However, I am absolutely convinced that these dynamics will reabsorb in the long run, and that the PE industry is certainly expected to grow significantly, especially because of the enormous levels of dry-powder, the highest ever recorded.
Therefore, I believe the current scenario to be a complex but temporary environment since in the long-run, the trend is supportive of further growth of the industry.
At the moment, there are record levels of dry-powder, but the macroeconomic turmoil is weighing the industry down significantly. According to your experience, which are the sectors that sponsors are currently most interested in? In your opinion, which could be the strategies sponsors will pursue to invest in such a complex context? And therefore, in the current market scenario, how does a sponsor can stand out from the crowd?
Given the complex macroeconomic scenario, PE funds are focusing on investment opportunities in sectors judged to be more resilient to macroeconomic turmoil, looking with interest at Tech (the sector least affected by the slowdown), Pharmaceuticals and Healthcare, and assets with a strong ESG footprint and well-positioned to take advantage of trends including the energy transition, which will have a significant impact in the future of the industry and will be a major growth driver.
Considering Tech, apart from the different facets it takes in different countries (for example, think about the differences between the sector in Italy and in the US), it is one of the most interesting sectors in terms of overall volumes mainly due to its scalability, and also because it is the industry that drives innovation in many other neighboring sectors that, sooner or later, will go through the digitization process.
In terms of fund strategy, there are sustainability-focused pan-European mid-market investors which aim at acquiring rapidly expanding companies that capture long-term environmental trends.
Therefore, I believe that the funds that will be able to emerge as winners from this phase are those with a value creation proposition that leverages on macro trends, and therefore will be able to have a competitive advantage over the others, securing an intense deal flow.
On one hand, uncertainty acts as a cap on deal activity, especially for larger transactions requiring higher leverage. On the other hand, however, LPs will continue to favor specialists and larger funds with top-tier performance. Therefore, which segment of the market do you expect to be more active?
As already stated above, our view at Bain is that, despite the current, very complex scenario, there will be no impact in the long-run especially for large funds with a solid track record, but in the current environment the difficulties on the financing side make the mid-market segment more resilient and active.
In addition, the deal origination process has also changed significantly over the last few years, and now it is mostly driven by the internal scouting of opportunities (“proprietary deals”), whereas in the booming years of PE before the Russia-Ukraine war, the market was mainly driven by sellers.
As a result, today we see more opportunities on smaller deals, especially for thematic funds with a strong ESG angle.
Considering the geographical point of view, are there different expectations in Europe against Italy? And what about Europe against the US? Generally speaking, could you help us to better frame the current state of the affairs?
The opinion we share internally here at Bain is that at the moment there are few deals in almost every region in the world, including the US, Europe, and Italy. Probably the market that has been performing better in the last few months is the Asian one, also because it is relatively a less mature market.
Looking at the data, the number of transactions in the first quarter of 2023 is among the lowest recorded in a decade; therefore, it is clear that we are going through a significant crunch. The uncertainty I have already mentioned earlier makes PE funds guarded concerning investment opportunities. Indeed, despite being seated on a huge pile of capital ready to be deployed, PEs are still waiting for the right time to invest once the current tensions subside (high and persistent inflation, high-interest rates, availability of financing, gaps in valuation multiples and supply chain disruption just to mention some of them). We are currently going through a stalemate because sellers’ expectations are skewed towards the very high multiples recorded back in 2020 and 2021, while buyers are capped because of the very difficult access to sources of funding. Therefore, the current environment is characterized by asymmetric expectations between supply and demand, and this aspect is reflected both in the length of the processes, which are on average longer than they used to be in the recent past, and in the difficulty of reaching an agreement and closing a deal once an investment opportunity has been identified.
Thus, it is clear that the factor that will drive the future development of this industry is the macroeconomic environment: if the global economy will succeed in putting the specter of a recession behind us, we can expect a solid recovery. In other words, it is a matter of finding a new balance in terms of both supply and demand and leaving behind some of the uncertainty about macroeconomic fundamentals.
The Q4 of 2022 was by far less intense compared to the same period of the previous year, especially in the US, while in Europe the real slowdown has been noticed probably more in the first months of 2023. That said, as repeated many times before, I am convinced that this is a very specific scenario that is dependent only on the current macroeconomic environment.
Given the current macroeconomic scenario, which are the most evident trends in fundraising?
The clearest trend we have seen in recent years concerns the rising relevance of thematic funds.
Specialization by verticals and sectors has proven to be a winning strategy in the market, partially because of the cumulative expertise gained by PE professionals and the solid track record that has become an allured business card, rewarded by international investors. In contrast, the more classic generalist-driven strategies seem to be less appealing to potential investors.
These considerations, however, must also take into account the funds’ size. Indeed, larger funds are more likely to launch thematic funds, since they have more experience across a variety of sectors, while the phenomenon is less common for players in the mid-market, where there are still significant development opportunities. In the end, in the next few years, I expect the rise of highly specialized PE funds promoted by international PE firms, which will look at investment opportunities across Europe with a very well-defined set of investment criteria.
Since the beginning of this macroeconomic turmoil, have you noticed more focus on the due diligence process, as buyers fear the risk of uncertainty now more than ever?
I do not believe that there has been a real change in due diligence processes. Rather, as mentioned above, until some months ago sellers were able to manage very quick processes, and this resulted in lighter and shorter due diligence processes, whereas today the due diligence processes have lengthened, partly because there is less hurry to close deals. Concerning this, there has been a very significant increase especially in the due diligence phase aimed at the analysis of the sponsor case, that is the business plan based on which lenders decide whether to provide financing for the transaction.
Considering new investments, have you noticed a resizing of the expected IRRs on recent deals?
Because of the confidentiality that GPs maintain on the issue, publicly there is not much discussion on this theme. Furthermore, this also depends on how management incentives are structured, with some managers having their variable remuneration based on IRRs while others on Cash-on-Cash multiples.
As also evident from the Bain Global Private Equity Report, what we have observed in the past is that funds that can invest in a complex environment tend to realize higher returns, and typically there is a much sharper polarization of returns in times of crisis. This phenomenon tends to happen because of a variety of factors. On the one hand, entry multiples are lower, which makes it easier to create value through multiple arbitrage (perhaps the most relevant lever used by PE funds in recent years), and on the other hand, macroeconomic turmoil can weigh heavily on the balance sheets of even the most robust companies. As a result, PE firms can grab attractive valuations assets whose fundamentals are very sound even if temporarily impacted by a bad macroeconomic outlook. As a result, EBITDA expansion strategies also appear to be viable and highly remunerative.
Taking the financing side, what is the current average percentage financed via equity and debt? Are there funds willing to finance acquisitions only via equity? And, related to this, as banks become more conservative and the specter of a credit crunch weighs on the market again after a decade, what do you expect to see in the near future?
Looking at the strategies put in place by PE funds, it is possible to notice a significant reliance on both Private Debt funds and direct lenders that provide the financing needed to close deals by granting availability of sources otherwise not available from banks, albeit at higher rates. However, it is probably still early to understand the impacts of current conditions on the use of alternative sources of funding in LBOs.
As a result, once the deal-flow has finally stabilized, it will be interesting to understand which are the trends in financing. In addition, these dynamics depend very much on deal to deal, from fund to fund: there are players who, given their strong interest in an asset, are willing to finance it entirely with equity to quickly close the deal, while others prefer to take a more conservative approach.
As macroeconomic conditions have radically changed, sponsors need to rethink their value-creation strategies. Can you share with us your perspectives on the topic?
Winning strategies in a turbulent environment are those based on a proactive approach in the management of portfolio companies. Therefore, we are noticing that funds are increasingly active in managing their portfolios, and are more and more setting up in-house teams, which, in addition to overseeing operational efficiency, also analyze opportunities for add-ons, since buy-and-build strategies are one of the main levers for creating value in a complex macroeconomic scenario.
In addition, these strategies are aimed at achieving a twofold objective: on the one hand, in the case of primary deals, they allow to benefit from an expansion of the multiple at exit; on the other hand, in the case of secondary deals, add-ons allow to mediate high entry multiples.
Given the macroeconomic turmoil, how are PE firms intervening to preserve the financial soundness of their portfolio companies?
Given the macroeconomic pressures, recently we have observed an increased focus on portfolio management. To this extent, PE firms try to offset difficulties in obtaining credit availability by paying close attention to liquidity-related issues and working capital management. In more complex cases, PE executives also study alternative solutions to access debt restructuring and other operational efficiency levers that can lead to an improvement in the operating performance of their portfolio companies.
Apart from the key role played by portfolio companies’ managers, the support coming from PE funds executives becomes increasingly relevant in the current state of affairs, especially for implementing successful external expansion strategies.
Another relevant aspect relates to the renegotiation of some contracts, with an increasing number of very specialized teams making it possible to review priorities with a view to value creation.
Given the current scenario of rising interest rates, do you expect the continuation vehicles trend to last or to slow down?
We do not have a particularly strong view on this topic. Once again, the dynamics depend very much on fund to fund: some investors transfer assets from one fund to another without any qualms, while others prefer to avoid these strategies. It is an angle of the PE universe that we look at less, but it will be interesting to see how it evolves in the coming years.
Considering exits, as we know, the IPO market shut down almost completely last year. However, sponsor-to-sponsor deals fell as well. Therefore, have you noticed an increase in the number of exits to strategic buyers? What are your thoughts for the future?
In recent years, there has been an increasing use of the M&A lever by corporates, and this is the reason why the number of trade sales exits has increased. This trend has been further accelerated by Covid, with a sharp increase in the number of transactions led by strategic acquirers, as many large conglomerates (especially in the consumer sector) have been faced with a review of their product portfolios, strategically reprioritizing and figuring out which assets are the most important and which should better be divested to reduce the debt burden and risks and secure financing sources that will allow them to continue to operate the business successfully, taking advantage of investment opportunities that may arise.
This trend should be read in two directions: on the one hand, corporates are increasingly present in the M&A landscape (commitment buy-side, a key lever for companies to grow in markets with low CAGRs where it is increasingly important to have significant scale), and on the other hand, we are witnessing more and more frequent divestments of business units, with carve-outs, which are an attractive strategy for the largest conglomerates, with the divestment of some assets considered to be of less strategic relevance.
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