Foreword
Luca Molinari is the Executive Director of Financial Services and Head of Asia for Direct Investments at Mubadala Investment Company. He graduated from Bocconi University in 1996 before he went on to work at Goldman Sachs in London. He then moved to Warburg Pincus as a Managing Director for over a decade across the London and São Paolo offices before joining Mubadala in 2016. Luca also serves on the board of directors as a Non-Executive Director at UniCredit. Over the course of his career, Luca has led or co-led investments with over US$ 20 billion in aggregate value. He is a seasoned finance professional with over 20 years of experience across the European, Latin American, MENA and Asian Markets in Private Equity, Public Investing and M&A Transactions.
Mubadala Investment Company, or simply Mubadala, is an Abu Dhabi based Sovereign wealth fund with US$276 billion AUM. Operating with a global mandate, it manages businesses spanning six continents that operate in multiple sectors.
Over two decades in the industry, starting off at an Investment Banking giant, then pivoting to Private Equity for more than a decade and now leading the Financial Services arm at one of the largest sovereign funds in the MENA region. Tell us about your journey and the lessons you took away at each of these phases.
It all started at Bocconi back when I graduated at the end of 1996. Even then, I had no idea that I was going to do what I did over the next 27 years. I had no idea that I would go to London, Brazil, and now the Middle East. What I was clear about, at least then, is that I was keen to have a career in finance. Bocconi equipped me with a very solid academic foundation, and introduced me to high quality internship opportunities around the time that I was graduating. On that basis, I figured investment banking would give me a very strong platform. I had four fantastic years at Goldman Sachs. I then moved to the private equity sector with Warburg Pincus, where I spent nine years in Europe and five years in Brazil doing early-stage, growth stage, late-stage investments across a variety of sectors. For the last eight years I’ve been at Mubadala in Abu Dhabi, covering a wide range of transactions in many geographies, many industries and across the entire development stage. The lesson I’ve learnt at all stages in my career is to always spend a lot of time listening carefully to all the people that you interact with as part of your day-to-day life. In this career, what I find very rewarding is that it’s never boring and it never feels like a slog. Every day, you have the chance to see so many different situations, interesting people, and so many great businesses. You have to make a lot of decisions. Some of them turn out to be right, some of them turn out to be wrong, but you never stop learning in this business.
With your involvement in investments exceeding US$ 20 billion, could you discuss a deal that presented unique challenges and how you and your team overcame them? What lessons did you learn from that experience?
It’s a difficult question to answer because no deal is more unique than others. Every deal is unique in many respects. It goes back to the observation I was making before, that it’s a very complex environment. No investment looks the same as the other, and in every situation, you have to be aware of both the analogies and the differences compared to past experience. I also want to demystify a couple of common misconceptions. Doing deals is not the most difficult thing. At the end of the day, when people think about investing in private equity, they imagine a world of spreadsheets, lots of documents, lots of numbers, and sophisticated financing packages. All of that is true, and it’s there all the time. But it doesn’t determine your success ultimately. Where you win or lose, is in the ability to assess the less quantifiable parts of the decision-making process, starting with the people. At the end of the day, we are in the business of backing people to deliver against a target plan, against a backdrop of very imperfect information. In this respect, smaller deals are more difficult than larger deals. When you invest in a large business, there is a lot of history you can refer back to and learn from. In many situations, history gives you a good idea about what the future looks like. It’s not a perfect guide, but it gives you a good base. When you invest in a smaller business at an earlier stage, there is a lot less history you can fall back on. Your forward-looking predictions rely a lot more on your experience, your instinct, and the learnings along the way. I personally find it more difficult to invest in small businesses because analysis plays a less relevant role. As I said before, doing deals is not the most difficult part of the process. All you have to do, especially on large deals, is to show up at auction and pay the highest price. And trust me, they will sell the business to you! You only find out whether you made a good decision or not when you monetize your investments. And in many situations, selling a business is at least as difficult as buying a business, because there is a lot of negotiation and psychology involved in addition to sheer analysis and number crunching.
Given your extensive experience in both Europe and Latin America, and your more recent involvement in Asian markets, what are the major differences and challenges you’ve encountered when conducting private equity deals in these regions? How do you adapt your investment strategies to the specific nuances of each market?
The key difference is the stage of development of each of these markets. In Europe, especially for a large-scale investor, it’s a market that’s dominated by late-stage transactions, often leveraged. You need to know and be familiar with LBO structures. You need to know how to calibrate a capital structure and obviously, do a very good job at picking the right business. But again, financial engineering plays a role, at least to some extent, in the outcome. In more emerging markets like Latin America and many countries in Asia, there’s not a lot you can do with leverage because the debt financing markets are less developed, and many businesses are still going through an evolution phase in their growth trajectory. You need to rely more on the ability of the business to continue to grow its top line and profit margins and less so, on leverage. These are the key differences when you put those geographies side by side. For the non-financial parts of the analysis, there’s no better or worse markets. To succeed, it’s very important to be in tune with the local culture and ways of doing business. Remember, besides all the analysis and number crunching, this remains a people business, and the human dimension is very important. Doing business with management teams and other investors in Northern Europe is very different than Southern Europe or Latin America and Asia. The way you establish personal chemistry is very different and it comes with experience and exposure to these situations.
With the evolving regulatory landscape, what do you see as the most significant compliance and regulatory challenges for private equity firms today? How does Mubadala navigate these challenges when making investments in the financial services sector?
The investing environment is getting more complex. The risk levels are increasing, whether it’s the macroeconomic outlook, geopolitical tension or the regulatory trend. Everybody in this business has to accept that we are going to be dealing with an increasingly complex environment. At Mubadala, we do it in a very simple way. We have four fundamental values that drive our business, and these are in no particular order – inspiration, accountability, partnership and integrity. Integrity to us means doing the right thing, the right way, even when no one is watching. And we just don’t compromise on that. As I said before, we are in the decision-making business. We can take a view and accept a certain level of risk when we look at market trends or execution of the business plan. We are not taking risks on regulation and compliance. If we have a shadow of a doubt that a situation might put us on the wrong side of regulatory compliance, we move on. The world is a big place, and we don’t want to be associated with regulatory or compliance missteps. It’s not an area in which we are comfortable calibrating the risk. For us, it’s a category error. I think it’s very important when it comes to long-term growth, as well as choosing the right investments.
Private equity investments often involve managing and adding value to portfolio companies. Can you provide examples of specific strategies or initiatives you’ve implemented to enhance the performance of a company within your portfolio and drive value creation?
There are many situations that come to mind and it’s not possible for me to comment on specific companies or situations, but I can give you examples of what those initiatives have been. Again, it’s a crucial aspect of performance results and alpha generation. Private equity and investing in general, is a ferociously competitive business. At the end of the day, we all run very similar models. We all have access to the same information and benchmark. So, what we do from the moment we make an investment till the moment we exit an investment, and that’s a period of time measured normally in years, is crucial to the outcome. There have been situations where we realized that we had to strengthen and upgrade the quality of the management team. So, we initiated the changes at senior management level. There are situations where the companies that we invested in were suffering from weak sales and marketing implying the problem was in the top line. The solution was to implement new processes and introduce new people to reinvigorate the growth rates of the top line. There are other situations where the problem is in the cost structure, especially in periods of turbulence. If you are able to maintain or increase your level of efficiency, you can create a lot of benefit to the bottom line. Sometimes it’s working capital optimization. It’s very often an overlooked area for improvement because obviously, if you create an extra dollar of profits, you create a multiple of that in terms of value, whereas working capital is more like dollar for dollar. But especially in large businesses, you can create a lot of value if you are more efficient in managing your receivables, payables and inventory. What I’m keen to emphasize, though, is that it really is hard work. It’s very easy on paper from the outside in looking at the spreadsheet to say – This business is growing at 2%, but it should really be growing at 3%. The business is making 15% margin, should be 18%. What it means in terms of achieving those targets, and the extent of changes that you have to bring into the company in terms of people and processes is significant, difficult and time consuming. It looks trivial from the outside, but improving the performance of a business by one or two percentage points is a tough job. For early-stage businesses on the other hand, as an investor, you rely a lot on the ability of the founder and the management team to implement the vision. At that stage, you are taking either market risk, product risk or concept risk. The strategic priority is to make sure that you achieve the revenue generation stage, and the growth opportunity is as large and as interesting as you imagined in the first place. Cost optimization and balance sheet optimization, in my experience, is not the strategic priority in early-stage investments.
Co-investments are common in private equity. Could you discuss your approach to co-investing with other firms or institutional investors, and how do you ensure alignment of interests and decision-making in such scenarios?
Let me go back to the four core values that I mentioned before. One of them is partnership. Partnership is something that you see pervasively across Mubadala. It extends beyond the way we work within the team and across different teams in Mubadala. We are a large, complex, and diverse organization, but we all have the same objective, which is to execute the best possible investments for our stakeholders. Partnership is also very relevant to the outside world. The majority of our investments are structured in partnership with other traditional private equity firms or other sovereigns or other financial institutions. Situations in which we are the only institution are rare. If you go through our history and activity, you will see that most of what we do is in close coordination with other top-notch institutions. It includes the who’s who of traditional private equity and sovereign investment entities and other types of institutions. How do we ensure that there is a common vision and convergence? Again, it’s part of getting it right in investing companies. We try to get it right more often than we get it wrong. We don’t have a perfect record in aligning our interests with our partners. No one in the business has. Like in a marriage, it’s about getting to know your partners. The more you work together with institutions, the more you learn about what’s important and what the objectives are for one another. You try to create as strong an alignment as possible in the way that the investment is structured. Ideally, you would go into the investment at the same time as your partner. You all start from the same cost basis. There are situations where we come in a little later into an investment or other investors come in a little later. Then there are several arrangements you can put in place in your shareholder agreement to make sure that any misalignment or divergence is minimized. However, it’s never perfect and mistakes are made along the way, but over time we have learnt how to choose our partners. I’m happy to say that over a long period of time we’ve got more of those decisions right than wrong.
What do you think is the scope of M&A activity in the MENA region amid sluggish deal making and increasing dry powder in the PE industry?
We have a global mandate, so the scope of our activities is not limited to the Middle East, but what you said is true for many large economic regions. We are at the point in the cycle where there are more headwinds than tailwinds, interest rates are high, leverage packages are getting smaller, valuations are compressing, volatility is increasing, and the result is that the level of activity is reducing across the world. Our philosophy is that we are not market timers, we don’t spend our time trying to invest at the bottom of the cycle and sell at the top of the cycle. It helps, don’t get me wrong, but if you try to base your strategy on timing the market, I can guarantee you will get more decisions wrong than right. We focus on identifying attractive businesses that have strong unit economics and solid fundamentals that can outgrow the market and competitors in every phase of the cycle, and businesses that we are happy to remain invested in for a long period of time if for any reason the equity capital markets, or the M&A markets are not there at the moment in time. In my experience, if you own a good business, you will monetize it on attractive terms at some point when market sentiment improves. You just need to be patient, focused on quality, ignore the vagaries of the market cycle, and focus on fundamentals.
As a Non-Executive Director of UniCredit, you have a different perspective on the financial industry. How has your role in corporate governance influenced your approach to private equity investments, and what can aspiring private equity professionals learn from your experience in this dual role?
Being part of the board of directors of companies is a fantastic learning experience and it’s also very rewarding. As I said before, a great aspect of this career is that you’re exposed to lots of different people of different backgrounds and very high caliber. The board of directors of any company, not just UniCredit, is a forum in which very experienced and successful professionals get together and pull their weight towards the common goal. And an effective board is one where the aggregate result is way more than the sum of the parts. In a board, you want to see a balanced mix of backgrounds and experiences. A board where everybody looks the same in terms of profile, background, and inclination is a suboptimal steward of the company’s governance because you want to have enough diversity and differences of opinion on the assumption that everybody is there to serve the best interests of the company. For everybody who is considering a career in private equity, my word of advice is to try and get exposed to boards as early as possible. When you are relatively junior, you are more likely to be there as an observer, taking notes and learning by observation, listening and osmosis. Obviously, as you become more seasoned and experienced, your relative contribution increases over time, but at any level of seniority, being able to be in a boardroom, it’s a very effective learning tool to become a good investor. It also adds to the value creation aspect of the process. I remember in my very first board meeting many years ago, I could barely make sense of what was being discussed, and then before you know it, like everything else in life, the more you do it the better you become at it. Over time, you become pretty effective at contributing to the discussion.
Can you provide insights into your approach to evaluating political and geopolitical risks in the Asian countries where you make direct investments, and how these considerations are integrated into your investment decision-making and risk management processes?
We are aware of the tensions and after you’ve spent enough time understanding a business or an investment opportunity, you weigh the pros, cons, attractions, and the risks. When we discuss geopolitical tensions, the possibility that there is a significant risk that those tensions can result in that business either ceasing to exist or being severely impacted, becomes a matter of how you calibrate risk tolerance. Again, as a sovereign responsible investor, if we think that there is a not an insignificant chance that we would suffer huge losses on an investment, we don’t do it and we move on to evaluating other opportunities. At this stage, we don’t think the risk level is high enough to deter us from making investments. Obviously, we are not oblivious to the environment around us. You have to properly assess the risk. You need to make sure that when you run through the upside analysis, there is enough upside at the other end to compensate for the risk that you are taking, going in. We believe that most of the Asian markets are attractive in terms of our ability to find enough interesting investment opportunities. If it doesn’t work, we are not going to blame it on the environment or governments. The blame lands on us if we can’t make it work. We know that the risks exist, but not at such a high level where we don’t want to invest.
What was your time like at Bocconi and how did it shape your career? What advice do you have for students wanting to pursue a career like yours?
I had a fantastic time at Bocconi. I went in as a kid and four years later I was an adult (it was a four-year program at my time, I’m old…). It gave me great preparation for a business career. It instilled a very strong sense of responsibility, and I had amazing teachers. I connected with so many fellow students that I’m still in closely connected with. Even though I left Milan for London immediately after graduation, I’m still in touch with a lot of my university mates as it was a great school life. I feel a huge debt of gratitude to Bocconi, and I always visit the campus with great pleasure when I’m in Milan. The advice that I would give to students is to stay positive and be willing to follow a career path that you are truly enthusiastic about. I found attraction and enthusiasm for finance, and I followed my instincts. The first steps of any career are the hardest, you feel lost, and often your success will not depend only on your abilities but other many variables in play. So, resilience is very important. Don’t give up, stay the course, listen to your trusted mentors and you will be successful. I know many other friends of mine from Bocconi that have chosen different career paths in management or in academics and they’ve all been very successful. I have the highest possible amount of respect and gratitude for Bocconi, and it was great for me to be invited to share my experience and insight after so many years.
Comments are closed.