By Andrea Cappellotto, Alessandro Panighel, and Marco Levorin
First up, on behalf of the whole BSPEC team thank you for accepting our invitation to this “Coffee Break With”. You have an outstanding educational background from Bocconi University and HEC Paris, enriched with an MBA from Columbia Business School, which ultimately led you to McKinsey in New York. What drove you to leave New York and move to EQT, and the infrastructure team in particular?
Let me start by saying that consulting is a great choice for those students that are both ambitious and undecided about their path after school, as it lets you experience different sectors and industries, giving you the opportunity to choose what you like and what you don’t.
However after more than 5 years, despite gaining diverse experience and extensive knowledge in consulting, I’ve started to feel a lack of ownership in the projects. Consulting involves advising companies and then moving on, leaving me curious about the long-term impact of my work. Additionally, I started to feel a gap in my knowledge around technical business aspects beyond the commercial ones often encountered in consulting, particularly in financial, legal, and tax areas. This led me to transition to Private Equity.
I chose EQT for its informal and non-hierarchical culture (some call it “Scandinavian”), known for being open and transparent, and its top performance, as it’s the largest and one of the best performing European Private Equity firms. EQT’s focus on value creation through operational improvements appealed to me much more than the financial engineering practiced by other firms, and I was particularly drawn to the infrastructure team due to the vital role infrastructure plays in societal and economic development.
Considering that infrastructure investments tend to have relatively high leverage, to what extent does the current macroeconomic environment, characterized by high interest rates, represent a threat to infrastructure fundraising and infrastructure returns?
Rising interest rates do pose a challenge to the value of infrastructure investments. In a Discounted Cash Flow (DCF) model, higher interest rates reduce the present value of future cash flows, a factor that is particularly impactful for infrastructure due to its inherent low returns and reliance on high leverage. This makes infrastructure less attractive compared to other assets, especially when investors can find similar returns with lower risks in fixed-income instruments in a high-rate environment.
However, there are several mitigating factors for infrastructure investments. Firstly, most infrastructure businesses benefit from inflation, as it often leads to increased revenues through a pass-through mechanism. Inflation protection is one of the key characteristics that we seek when investing in infrastructure. Secondly, infrastructure investments historically show low correlation with other asset classes, especially during economic downturns, making them an attractive option for diversification. Lastly, there’s a significant investment gap in infrastructure, which, coupled with political support, creates opportunities for growth in this sector. While high interest rates do impact infrastructure values, the extent varies based on the specific infrastructure, and the decline is often softened by these considerations.
As you mentioned, valuations generally take a hit when interest rates are higher. Consequently, when entrepreneurs are anchored to old multiples, there is the challenge of adjusting their expectations. Given that infrastructure investments involve sophisticated players, do you think this adjustment is easier?
It depends on various factors. EQT Infra does not focus on core infrastructures; instead, we concentrate on companies operating in this sector. Therefore, the theme of expectations is crucial: entrepreneurs are less sensitive to issues such as WACC, interest rates, DCF, etc. If entrepreneurs are anchored to historically high multiples, changing their expectations becomes very challenging unless they feel the weight of the macroeconomic context on their operations. This is the first time that Private Equity, as a mature asset class, faces a downturn. In 2006, it did not have the size it has now, and this already creates an ecosystem of its own, making it more resilient. In practical terms, if you are desperate to buy you now have many potential targets to buy from other funds who understand better the consequences of movements in macroeconomic factors on valuations, and if you’re desperate to exit you have a large pool of potential buyers for your own companies. However valuations will definitely be impacted, no doubt about that.
Do you believe both public and private entities are adequately equipped to navigate the increasing complexity of collaborations in infrastructure investments, extending beyond traditional procurement contracts? Does this preparedness factor into your investment decisions?
When considering investments in infrastructure, the readiness of both public and private entities to handle complex collaborations is vital. The ability of a country to be business-friendly is a key factor in our assessment, especially in the Business-to-Government (B2G) context. There’s a clear need for governments to adapt to bridge the massive investment gap in infrastructure. While there are signs of openness driven by necessity, as seen in certain transactions like Telecom Italia’s deal with KKR, much work remains.
Take Italy’s water sector, for instance. The referendum was misinterpreted as a cost issue for citizens, whereas it was about allowing private companies to manage water facilities. Italy struggles with significant water loss in its system and requires substantial capital expenditures to address this. The lack of political will to attract private investment, given the state’s limited resources, is a significant barrier. These factors play a crucial role in our investment decisions, as they influence the feasibility and success of infrastructure projects.
Considering EQT’s recent BESS investment in the UK, are you interested in Italy’s utility-scale storage systems, crucial for smoothing out the production curve of renewable sources, to be built under the 2030 FF55 scenario?
We are indeed interested in utility-scale storage systems like BESS, which are crucial for balancing the output of renewable energy sources. In Italy, we already have a presence in the renewable energy sector through our Solarpack portfolio. Our interest in BESS is part of a broader exploration of various storage methods, including advanced pumping systems and other innovative storage technologies.
The inevitability of widespread energy storage is clear, and we’re actively seeking solutions that align with our investment criteria. Our collaboration with Francesco Starace, former CEO of Enel who recently joined EQT as a partner, is particularly beneficial. His experience with Enel, which has a significant portfolio of battery development in Italy, provides us with valuable insights for evaluating potential energy storage investments.
Terna plans to use BESS and other systems together with hydrogen electrolyzer, but many investors are sceptical of their effectiveness as of today, what do you think about it?
Regarding the integration of BESS with hydrogen electrolyzers, there’s a general misunderstanding about hydrogen’s role. It’s more of an energy carrier than a source, and its efficiency varies across applications. Michael Liebreich, a co-founder of BloombergNEF, offers a brilliant metaphor: hydrogen is like a Swiss Army knife, capable of various tasks, like slicing and screwing, but you would not use it to cut down a tree or assembling a piece of furniture. Similarly, hydrogen can be applied in various ways, but it’s often not the most efficient choice. We need to carefully scale its potential uses and be selective.
Currently, the cost-effectiveness of electrolyzers is questionable, as several projects have been canceled due to financial constraints exacerbated by rising interest rates. The discussion around hydrogen is shifting from initial excitement to a more focused and realistic approach, highlighting the need for technological advancements to make it viable for specific applications.
ESG investing has recently faced some backlash due to its argued ineffectiveness. Regarding the infrastructure case, what is your opinion on this matter? How do you prevent greenwashing?
The ESG wave, while not without its flaws, is a significant step forward. The key to improvement in any area is measurement, and the ESG movement has catalyzed companies to develop frameworks for assessing their impact beyond just financial metrics. This shift towards considering environmental, social, and governance factors is pivotal for progressing towards a better society.
In infrastructure industries, the risk of greenwashing is particularly high. A striking example is an ETF that was intended to invest in companies meeting specific ESG criteria but ended up primarily investing in oil & gas companies. This happened because the criteria for ESG ratings were too simplistic, often satisfied by merely having a sustainability report. Such instances are not uncommon, highlighting the ever-present risk of greenwashing in infrastructure as well.
At EQT, a thoughtful implementation of ESG is a serious commitment. We approach this challenge by hiring experts deeply knowledgeable about sustainability, like Francesco Starace. We also have a dedicated sustainability team guiding our investment decisions. Beyond that, we invest heavily in training our team to raise awareness about greenwashing and foster a culture of genuine sustainability. It’s a multifaceted approach involving mindset, governance, resources, and continuous education.
Investing is all about risks and pricing them, but what about risks that are deal killers?
Understanding and managing risk is central to investing. It’s crucial to distinguish between risks that can be influenced and those that cannot. Deal-killer risks, in my view, are those uncontrollable risks that can severely impact your capital. Investing in scenarios with such risks is more akin to gambling than informed decision-making. You might still choose to take the risk, but it should be a conscious decision with awareness of the potential consequences.
Can you provide us an example of this kind of risk?
For instance, consider valuing an Italian company that has potential for expansion in France. While you need to factor in the prospects of this expansion, what you are paying for on day 1 is mostly the cash flows generated by the existing Italian business. If the company’s main market in Italy faces existential threats like legal actions or potential competition from dominant players like Amazon, you’re dealing with an uncontrollable risk. In such cases, the expansion plans become secondary, and your capital investment is significantly at risk.
Several BSPEC members are taking their first steps toward their future career, and you undeniably represent a reference point for us due to your remarkable accomplishments. Do you have any advice you would give to your younger self? Would you have done anything differently?
To my younger self, I would stress the importance of viewing life as a marathon, not a sprint. Early career achievements, like prestigious internships, may seem critical at that moment, but they often have little long-term significance. Success comes through varied paths; for example, a friend of mine recently sold his company to Just Eat, after years of hard work, during which many of us were pursuing traditional career paths in consulting.
Patience is vital. It’s important to allow yourself time before drawing conclusions about your career trajectory. Most people don’t have a clear vision of their ultimate career destination, and that uncertainty is perfectly normal. This realization should alleviate stress, not cause it. Life presents numerous opportunities to assess if you are on the right path and to change direction if necessary. A friend of mine, for instance, transitioned from a law career to venture capital, exemplifying the flexibility to pivot careers.
It’s also Important to remember that work is just one aspect of life. Your job should contribute to your overall growth and wellbeing, not just offer financial remuneration or prestige. Understanding how a job integrates into your broader life goals is crucial.
Certainly, this is a topic dear to all of us students.
Work hard, I insist, but do it when it makes sense. Work for substance, for learning, and for creation. Don’t work simply because someone told you that you should put in long hours. Work smartly, and do so from the start. Indeed, efficiency and the ability to direct your efforts are what ultimately define long-term success.
Prioritization is crucial.
When you started, was there a strong tendency towards M&A and consulting, similar to what we see now?
Absolutely, perhaps there was a bit more inclination towards sales and trading, somewhat tempered by the rise of machines and the growth of Private Equity. For me, Private Equity was the perfect job that I didn’t know existed. Many consultants and young bankers aspire to work in PE and certainly having a background in advisory is beneficial.
The reason these two jobs are so coveted is precisely because no one knows where they want to go. If you were a sailor, you could choose to move in 360 degrees, gradually narrowing down your options until these 360 degrees close in on a direction. There’s no one road, but you navigate through exclusion. M&A and consulting expose you to various sectors, and in the case of consulting, numerous diverse projects. If your goal is to close this circle, these experiences help you narrow down your paths. Additionally, they maximize optionality; you develop a method and hard skills that any company would desire, even just for the sheer amount of hours you’ve put in.
Looking at the salary right out of school is shortsighted; a career lasts 40 years. It’s a matter of how that job fits into what you want to do. If you have better alternatives, you should feel absolutely free to pursue those alternatives.
We find ourselves very much in the metaphor of the tightening circle…
Seneca once said, “There is no favorable wind for the sailor who doesn’t know where to go”. The greatest investment you can make after graduating from university is to learn and start closing this circle. Optionality is the enemy of building beautiful things. If you do everything to keep many roads open, you will never get far on any road.
You have achieved incredible goals. Do you feel like you have arrived?
I’m far from feeling like I’ve reached the finish line; this is a genuine marathon. My career truly begins now. I’m ready to take charge, make my own decisions, and explore potential deals for example. The initial phase is about learning, but now it’s time to put that knowledge into practice. While I recognize there’s still an infinite amount to learn, I also feel like I’ve finally graduated from an extended university.
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