Business Breakdowns
· Zack Fuss
[00:00:00] S0: So go a bit deeper on that topic as it relates to their broader capital allocation policy, but also governance. Because one of the reasons that holdcos tend to trade at a discount to their sum of the parts is because people don't trust management to either treat their minority shareholders well and or focus on growing NAV instead of serving the best interests of the family themselves. And so how do you think about that here given John Elkann has a demonstrated track record of creating value? But to your point, a lot of that value has come through value appreciation at Ferrari. What does the go forward capital allocation strategy look like and how do you think about governance as it relates to their minority shareholders?
· Krishna Mohanraj
[00:00:00] S1: Capital allocation is the key question here. You have a holding company right now with really an odd mix of assets. What you're asking is what will this look like in five to 10 years? And that comes down to capital allocation. There are one or two negatives. I mentioned Juventus. They are small in my opinion. Once I've gotten that out of the way, almost everything I would say on capital allocation is positive. The way they define the investment approach itself is very systematic and very clear. They frame their approach as a duality, entrepreneurial spirit on one side and financial discipline on the other. If we start with the entrepreneurial spirit, they define their purpose as building great companies with great people, which really means buying and owning companies which are great or potentially will become great. And they measure their success with a very clear metric, per share growth in NAV and benchmark it against the MSCI World benchmark, which recognizes that they're global and their canvas is really the whole world. But building great companies with great people sounds nice, but it's not an easy thing to do. And they've definitely had exceptional success in turning a mess that was Fiat into a more manageable group of global companies. They've done generally well with several investments over time and of course on their chosen metric, they've done really well, benefiting from the value unlock in Ferrari, but it's still a work in progress. That is an open question as to where this goes in 10 years. The second part of that purpose is the people. And to your question on corporate governance, more than half of their role is about finding the right people, finding the right leaders, understanding their plans and then giving them the space to execute. They are looking for people who can think long term, but can act in the now. The greatest success again, Sergio Marchionne was one of the greatest CEOs ever. He was an outside CEO, but they're also open to people who come both from within and from outside. Benedetto Vigna at Ferrari was an outsider. His selection was super interesting. Very strong technical leader, many patents in sensors and microelectronics. He seemed a very inspired choice, again, not auto, to lead Ferrari into the EV world. At the same time there are also homegrown leaders.
· Krishna Mohanraj
Scott Wine now at CNHI, he'd worked there previously and moved with the spin off. He came back to take the CEO role. Finding the right people and being very open to both insiders and outsiders is a big part of what they want to focus on. And once they find a good leader, they view their own role more like a critical friend rather than an aggressive owner. They will come in, look at plans, look at the Orgs, but let the leaders execute. That's really their structure of how they want to go about it. The flip side of the duality or the balancing side is the financial discipline. I would say that is the one core tenet they have never compromised on in the last 20 years. And it very much comes from the initial days of Elkann when, as I mentioned, the family had to put in more capital to save the company from going down. So their very simple philosophy there is keep debt between 10, 20% of the asset base and increasingly keep the mix simple as well. You know, mostly bonds, very little bank debt, well spread out long duration, five to six years. Gives them very simple relaxed capital position. That discipline means a few things. They will never be at the mercy of creditors. They can keep a stable dividend. They can play offense when the opportunity presents itself. And that could be either putting capital into new investments or in buying back their own shares. I think they value that way more than trying to, quote unquote, optimize their debt level. Essentially that duality comes down to act like an entrepreneur but with a rock solid balance sheet. And that's how they view the investment journey. And if you're managing a family fortune for the very long term, it's really the only way to do it.
· Zack Fuss
[00:00:00] S0: So in terms of further capital allocation, one of the nice things in some of these companies where they have private investments is there's potential for some of the unlisted companies to provide some sort of optionality. One thing I'd love to explore further is, is there anything inside of the unlisted portfolio that you think is particularly notable, either from a strategic perspective or from a valuation perspective? And then the second question is, as the business evolves, what do we think the future looks like? And perhaps we can take that after first discussing what does this private portfolio look like?
· Krishna Mohanraj
[00:00:00] S1: I would call it an odd collection. So you've got the Economist magazine. Exor is the largest single shareholder there. They used to own a small 5% stake historically and in 2015 they bought a larger stake from Pearson and became the largest single shareholder. Now the media business is a difficult one. By their own admission, it's getting more difficult with AI. Every journalist and every publication has to compete for relevance every day. But the Economist is a unique brand, a storied brand, business brand. It's not immune to this. But there is optionality there. Owning a marquee asset, or at least being the lead investor in a marquee asset like that. There is also some element of pride in public service, their ability to provide stable long term support, journalistic independence. It is more than a pure financial investment. But the optionality in the Economist is very interesting. You've got Institut Mérieux, which was a recent investment. It's a family owned health care company in a range of things. Diagnostics, vaccines, immunotherapy, food safety, nutrition. It's really a first step for Exor into this world. Along with the investment in Philips, there's a lot of match with the family old culture with the Mérieux family. They really see a very long term partnership there. Strategically this asset is super interesting and not really talked about because it helps them build expertise in an area that they see as a very long term fit. And then you have Louboutin. Louboutin is a French luxury brand, iconic women's shoes. Luxury is a difficult space to invest in, especially at the very high end. There is a lot of demand and a lot of players aggregating smaller players. They were able to find Louboutin because Louboutin was looking to be part of a more patient owner like Exor rather than be part of a large luxury group. Then they have Welltec. Welltec is another very interesting tech company. It's in the field of robotics and tools for the energy industry, basically oil and gas, especially in oil wells. Very unique investment and Exor was able to time that investment almost perfectly. In 2016 when the entire energy complex was under stress, they were able to make a partnership with Welltec. They also started an asset management platform in 2023.
· Krishna Mohanraj, Zack Fuss
It came a little bit out of their relationship with their ownership of PartnerRe and the people there. And then eventually the sale of PartnerRe to Covéa. It has about 6.4 billion in assets across a range of strategies. Long, short, public equities, fund of funds, direct private investments. It's operated independent of Exor. The idea is really to build a wealth asset management platform and attract talent across different styles. And they've had some initial success in terms of attracting really talented people from the industry. So that is another option for the future. Again, these are the things in the private portfolio that I would say aren't really valued as options right now. They're valued at face value, which isn't significant, but it could be. [00:00:00] S0: Notably, one of the assets you did not mention is their former reinsurance business, PartnerRe. Notably they decided to acquire then divest of that business quite quickly. But I'm curious just to take us through that decision making process and what they've learned or were able to incorporate into their business as a function of owning and then disposing of that asset.