Business Breakdowns
· Krishna Mohanraj
[00:00:00] S1: The PartnerRe transaction is actually a pretty interesting one to look at. PartnerRe was a reinsurance company that Exor bought back in 2015. They owned it for about five or six years before selling it. And honestly it turned out to be a decent deal for them. Nothing spectacular, but solid. I think the IRR came out to maybe around 9, 10%. It was also decent sized, 9 billion purchase price. I think a good case study in how Exor thinks about investments, the strategic rationale and also the willingness to change their mind. Reinsurance at its core is about taking volatility from others. That's the whole business model. But here's the thing. Markets hate volatility. So if you're a publicly traded reinsurance company, you're in kind of a tough spot structurally. The better home for a business like that, somewhere with a strong capital base, long investment horizon, pension funds, family offices. Berkshire Hathaway has shown how successful that structure can be for reinsurance. And I think that's exactly what Exor was betting on. They figured, look, we can absorb volatility better than most. We've got patient capital, we can be opportunistic when pricing is attractive. We can even make better use of the float on the investment side. The hope was that this combination would lead to higher returns overall. Here's what actually happened. Their experience was just okay. That was because of catastrophe losses. Those are, as we know, inherently unpredictable. It just so happened that during the period that they owned PartnerRe, the industry saw an elevated level of cat losses. Returns were fine, but probably not what they'd hoped for. At the same time, market multiples for reinsurance companies were high and there was significant market interest. Exor realized that they were getting a solid offer from Covéa, the French insurer. So they decided, all right, let's take the win and move on. It seems like their original idea was to hold this for the long term, but their experience nudged them in a different direction. Now here's the cool part. Even though they exited the business, made a reasonable return from it, they didn't walk away fully empty handed. Beyond just the financials, they actually brought in some strong talent from PartnerRe and from Covéa. Also a more long term partnership with Covéa to launch their asset management firm.
· Krishna Mohanraj, Zack Fuss
I think that fits in with how Exor operates in always thinking ahead, always moving the business one step forward. [00:00:00] S0: Now that we've presented the different parts of the business, the prominence of the listed equity portfolio and some of the longer tail opportunities in the private portfolio, the question then becomes what does the business look like? If you look back over the past 20 years, there's been a very material evolution and they're now at a point where the current portfolio, whilst having its opportunities in some of these listed companies that trade at undemanding multiples. But it's a relatively clean story. As the percentage of gross asset value attributable to Ferrari grows relative to the rest of the portfolio, how do you think they then go and reconcile that difference in the future? And what do you think John's future is for Exor in 2035 and 2050 and beyond?
· Krishna Mohanraj
[00:00:00] S1: There is a nice quote from Gianni that John Elkann quotes. Groups like ours typically go through three stages in their development. A time of strength, a time of privilege and a time of vanity. For me, the first is the only one that counts. Essentially what they're saying is that the heart of what they want to do is to invest in change, but maintain their financial strength along the way. That means change is slow, measured, but there is constant refresh and renewal and pretty much in every interaction with the investors John Elkann points out that they're constantly looking to change. Their intention is to renew that asset mix all the time, look for opportunities. There are three sectors that they've highlighted as for the very long term. Where they want to be, healthcare, luxury and technology. Very long duration plan to build both knowledge, expertise and investments in those three areas. Out of the three, luxury is kind of obvious with Ferrari. Clearly they know the space very well. They've made some small moves there. We've talked about Louboutin, and they also have a majority control of Shang Xia in the Chinese market. But the reality is there's not much to do in luxury. Luxury, especially at the very high end, is a super small, crowded space. Not that many companies that are independent, and if you want to stay in the super premium end, even less so. Anytime there is any opening, there is so much interest in unique assets that it seems like the likelihood of them finding anything at the right price is pretty low. Second, you've got technology, a space that until recently was very new to them, but so much is happening there. If you think about the depth and breadth of what's being created in AI, they are doing their best to build expertise through Vento, which is a seed program that they support in Italy. And also their ventures business has begun to mature over the years. They've taken some bets in mobility, some areas of AI. In fact, one of their investments through ventures is a company called Via. It's in the urban mobility space, essentially optimizing pooling of multiple passengers for vehicle fleets. Exor invested in 2020; they own about 9%. Just recently they have filed an S-1/A confidential filing for an IPO. Some early example of a success story coming out of ventures.
· Krishna Mohanraj
To add to what we talked about in the private space, lots of optionality there that could be hidden, that could play out over the next five, ten years. Also very interesting to note that earlier this year John Elkann joined the board of Meta, which at the very least gives him a ringside view to AI. And it's very clear that he has all the access to the who's who in Silicon Valley early stages, and it remains to be seen what could be a bigger step for them in the tech space. Finally, that brings us to healthcare, which is really the most promising area for them, at least till now. They are very clear on the long-term thesis, the secular need for healthcare. They're especially keen on the healthcare tech side of things. So imaging, diagnostics tools, genomics services. Even though they've called out technology as one of the three focus sectors, healthcare technology is probably where they're likely to spend, build more expertise and more investments. They've already had some significant investments. Philips and Institut Mérieux both seem great investments in themselves and also strategic, giving them a front row seat into that space. It's interesting if you look at the story at Philips. In hindsight, it would seem obvious why Exor would like the story. The last decade or so at Philips has a lot of resonance with their own restructuring of Fiat. Philips went from a mix of everything—consumer electronics, lighting, semiconductors—to a pure play global health tech company. And on top of that, it is also facing both difficult end markets and idiosyncratic issues of its own with a recall on their sleep apnea device. If you're looking to get into the health space, if you're looking for a company that is global, dominant in health and technology, and potentially on the path to greatness, which is a nice way of saying a turnaround, there aren't that many ideas at scale that could be better than Philips. I think they started with a 17, 18% stake and now increased to almost 20% board presence. They have an opportunity to be part of that journey, and they have the time, they have the ability to give Philips the stable ownership that it needs to execute for the long term. There is a bear case, of course. In healthcare, innovation takes much longer than people expect, and very often companies don't get paid for innovation because of regulation.
· Krishna Mohanraj
Just the way the markets are structured, it definitely looks exciting, and we will see how that evolves. And as that becomes successful along with bioMérieux—again we spoke about it—leading scientific group in that space, shared ethos of family ownership. In five years, Exor could be a legitimate player in health tech. At the very least, they will learn a lot in that space, and that could change the flavor of this group for the better. With a holding company set up like this and a leader who's opportunistic, doesn't seem afraid to make changes and take decisions, it's very hard to come up with a five-year view, let alone a ten-year view. So who knows what this group looks like in five years. To some extent, that also makes it exciting. Especially if you think about buying a collection of global assets right now at a huge discount and potentially significant optionality over the next five, ten years. I think it's definitely a bet on the jockey more than just on the current set of assets.
· Zack Fuss
[00:00:00] S0: Just to highlight that discount to NAV, we have a business or collection of assets today that would be valued around €180 a share, trading in the market for around €100. Clearly there's significant opportunity to close that discount. But also to your point, a handful of the most significant assets are themselves trading at somewhat modest multiples. Philips obviously has a turnaround story. CNH and Stellantis, which are going through their cyclical trough. The opportunity set here is seemingly massive, not just to close that discount, but also to continue to compound NAV. Unfortunately, we're coming up on time, and I want to ask our customary question: when you look at this story and the research that you've done, what are the lessons that you've learned that you can apply to other investments? And conversely, or alternatively, what are the other lessons that can be learned that can be applied to businesses or holding companies to improve the operational execution for their businesses?