Philipp: Welcome to another episode of In Your Best Interest, your personal finance podcast. I’m your host Philippp Muedder, and today I’m joined by Gianfilippo Cuneo. Gianfilippo founded the Italian office of Bain in 1989 after spending 22 years at McKinsey. He talks about his biggest investment, the €3 billion consortium buyout of the Italian Yellow Pages publisher Seat Pagine Gialle, what he spoke about with Warren Buffet during a lunch event, and how to manage a family business. Gianfilippo, I’m very intrigued to know more about your decision behind going to the US as an exchange student in 1959 - which was a long time ago.
Gianfilippo: Well, it was just a simple curiosity. I was doing well in school, and I was always looking for the next thing. So when I heard about the possibility of spending one year in an American family in high school, I jumped on it. And I got selected and left. At that time, I crossed the Atlantic by boat.
Gianfilippo: Yes. Because I had to bring all my clothes and things like that, and whatever. And the American Field Service was (02:00) paying for the boat trip. Actually, I crossed the Atlantic 4 times by boat because I did it on the way back. And then also when I went to business school, I wanted to go by boat, because it was nicer. It was a vacation. And also, when I came back eventually in '68, that was my last trip because I knew the boats were going out of commission. So it was a nice experience.
Philipp: So I lived in the US for almost 13 years after college as well. So how did that experience go from late 50’s Europe to the United States, right? At that point, kind of like the gold rush, but like all these exciting technological changes and wall street. How has that influenced you throughout life, that year in the US?
Gianfilippo: Well, that year in the US definitely opened my mind and made me understand early that the world was a place where I wanted to be. And therefore, when I eventually finished my university in Italy, immediately I applied for a scholarship to go to study again in the United States.
And then, I wanted to get a job in the States for a limited period because, at that time, the visa for students getting a job in the States was expiring in 18 months. But I found a small trick to postpone it to 24 months, but eventually, I had to leave.
And at that time, I was working in McKinsey, and they moved me to France. (04:00) And then I arrived in France in May, the end of May ‘68. And many people remember, May ‘68 was some sort of a revolution.
But the revolution had already ended by the time I got there. So there was debris from those smashed windows and trees that had been cut down by students. But business was normal, and then I eventually came to Italy to open an Italian office. And then the career continued for about 22 years.
Philipp: That's a long time at McKinsey, so lots of experience in different sectors then through that?
Gianfilippo: I almost will say all sectors. But going from automobiles to energy, to fashion, to banks. So it was a very wide experience. But during that experience, I was always intrigued. The question was, if we are so good at advising other people to do things, why don't we do them, those things ourselves. Why don't we try to make investments?
But at that time in McKinsey, that proposition was not accepted at all. And so, I actually was the first to spin off of McKinsey with another 17 consultants because we all wanted to test ourselves with the next things, doing a different type of consulting but also investing. And finding the money, and managing the money for investing and so forth. And it seemed (06:00) natural because, of course, we knew so many things. We knew how to improve companies; we knew how to select managers and so we learned the way of operating private equity funds. And it seemed very simple to us.
You just identify a company that needs to be overhauled and the management needs improving. Then you apply all the tricks that you have in your book, and then you improve the company. And then eventually you sell it for a profit.
And in fact, in Bain, when we left McKinsey, we knew that we had to find an alliance to serve our clients all over the world. We had strong relationships with clients like Fiat or ENI or Benetton.
And of course, those are international companies. So we needed to have quick access to an international network, and we found it in Bain. And we also found in Bain that they had already moved into private equity themselves with Bain Capital.
And I got to know Mitt Romney and became good friends, and I learned how they did things.
And then, it was natural to copy them quickly in Italy with a company that was an integral part of consulting, and the company was called Investitori Associati. And the first fund was minuscule, was 30 million, the equivalent of €30 million Euros of that time.
And in order to raise the money, then, of course, we had no (08:00) understanding of how to raise money. But we had an alliance with Banca Commerciale Italiana, who believed in us and helped us to convince investors.
And the first round was a great success, like all things - it was perseverance, ability and luck, of course. Because we stumbled on 3 initiatives that returned literally, returned billions for the investors.
Philipp: Yes, super interesting. So you kind of went from the consulting side at McKinsey where you really learned the toolset, you got the toolbox and then you applied it later on into the private equity space. So Gianfilippo then, if I may go back a little bit. So you're at McKinsey for quite some time, right?
Gianfilippo: 22 years, yes.
Philipp: Exactly. So you start to make some money yourself, right? Were you always already at that point with your personal money interested in investing it, or did you just save it in cash?
Gianfilippo: No, in McKinsey, we had the personal retirement fund of McKinsey. You were allowed to select the kind of risk categories that you would want your part of the fund to be invested in. And I always selected the highest risk, which at that time was private equity.
And I was amazed by the kind of results that I was getting through my indirect investment. So I knew that was the right way to go. Except that when I started with Bain, (10:00) the firm was called Bain & Cuneo, all my assets had to be invested in consulting because we needed to finance a new startup in consulting.
And then eventually, it became profitable pretty quickly. But we were really focused on expanding the consulting activity much more than the investment activity. Investment activity, we consider it to be more or less like a business card to show how good we were in consulting.
And actually, I must say I was late in understanding that it should have been the number one activity, rather than the secondary activity. And in fact, it took me another 12 years to really jump from consulting to private equity entirely. At the beginning, I was hoping to keep one foot in consulting and one foot in private equity.
But in a small market like Italy, we ran into conflicts of interest situations. We were competing for an acquisition against a client of ours in consulting. That wouldn't work. And therefore, we separated the private equity activity with two of our consultants. We separated the offices, we separated the brand, and although we did work together.
In fact, the biggest deal of all, and I think it is up to today, it might be one of the still (12:00) unsurpassed records of Europe was the Yellow Page deal in which we invested the - I led the investment of a consortium of private equity firms.
There were Apax, BC Partners, Bain Capital, and Investitori Associati in investing the equivalent of €600 million euros in the buyout of the Italian Yellow Pages. And then, I put the best manager I knew in charge of the company, and 4 years later, the investors have made 20 times their investment. So in terms of absolute returns, 20 times is a lot. About 20 times of €600 million is a sizable chunk of money that I still think today, is one of the best deals in Europe so far.
Philipp: (17:00) Yes, absolutely. That's a crazy big deal.
Gianfilippo: We were also helped by the fact that between the time when we bought the company, and the time that we exited, there was the big internet bubble. And the Yellow Pages where we were doing consulting work, and so forth, we were able, together with the management, the manager of the Yellow Pages, to reposition the Yellow Pages as an internet company. Not a stodgy old publishing house. And that's the reason why we bought it. The multiple of six times historical EBITDA, (14:00) and then we sold it basically at 40 or 50 times EBITDA. So that helped, of course.
Philipp: Of course. So most of your personal investments then up to that point have always been in your own company, right? In your own funds.
Gianfilippo: That's correct, yes. And very little real estate; I didn't even own the house in which I live in Milan because I always thought that renting is cheaper. If you have a high opportunity cost in investing, owning a house is a loss.
I did buy a house in the mountains, the house by the sea because in that case, you don't have the alternative of renting long term and you want to do it properly, but everything else was invested in the company; in the consulting activity, the leftover was invested there with the Investitori Associati eventually, also with other funds but also with individuals.
In other words, occasionally, I was able to meet some very smart young entrepreneurs wanting to do more things, and startups and things like that with a good knowledge of one business sector.
And I also put my money, my personal money, not investors money, but my personal money, behind some of these people. And of course, we get some failures, but also some outstanding results. (16:00) And because, of course, nothing is more powerful than a very capable individual with an entrepreneurial spirit, focusing on a single business and running as fast as possible. And so if you back that person, and that person is loyal and honest, you get the kind results that you cannot get in public markets, or even in a normal private equity.
In private equity, you expect to make twice the money or three times the money in five years' time. When you back an individual like that, you expect to make 10-20 times the money that you invest in him. But of course, you have to take into account the risk of failure. So in order to make a comparison that makes sense, you should say if I invest in a private equity fund, the private equity fund invests in 10 initiatives and gets some results.
If you invest individually, there's just one initiative. So you should make a comparison with a case of investing in ten individuals. But that, of course, is not easy, because it's also very time consuming, and these people require coaching, mentoring, empathy, support, time and therefore you cannot do many of those things.
Philipp: Yes, I know it takes a lot of time. But I like that you said, hey, even in private equity funds, there's diversification. So we always preach to people, hey, you need to diversify investments, right? Don't bet it all on one horse. And I do want to talk about one thing that you've talked about and you told me that you got to meet Warren Buffett twice, right?
(18:00) So obviously, Warren Buffett is, for a lot of people, the North Star when it comes to investing, investing philosophy.
So first of all, I would like to know how you get to meet Warren Buffett, because right now, people are paying a lot of money to meet Warren Buffett, right? Even for lunch that he auctions off every year.
And then also what did you learn from him? Or did you talk to him about investing?
Gianfilippo: Well, the first time I happened to attend a lunch, a private event with some 20 people in Italy. Warren Buffett had been invited to attend this lunch at the home of one of the members of the Moratti family, one of the wealthiest individuals.
They knew each other through different channels. But obviously, I got to talk with Warren Buffett, a 10 minutes conversation, because of course there were lots of other people in the room. And so, it was more of a social event.
But of course, by that time, I already had read most of his letters to shareholders, and I had the idea of writing a book. I had written other books before, but this one would have been focused on investing in Italy and comparing what Warren Buffett would have said as I interpreted his letters to the shareholders.
And what I would have said in a similar situation. Most of the time, I would have said the same thing, of course.
But the book is a nice (20:00) book that got a wide circulation in Italy. On one page, on the left page, you have Warren Buffett and he says something, and on the right page is me saying the similar things or different things on a number of subjects, all related to investing.
The market, the contrarian spirit, the selection of managers, when to get in, when to get out, these kinds of things. And of course, I was writing these books not just to earn fees, but as a business card, to give to investors.
Philipp: Yes, super interesting how you met him and how you wrote the book too. But if we talk about personal investment strategy in today's world, right? So you left that space. How would you describe your investment strategy and philosophy that you use now by yourself?
Gianfilippo: Well, of course, at that time, the normal path is that you invest your money, the money you have - in things that you know and then things that you have some influence in. Companies in which you are a shareholder, and you are sitting on the board or together with other people, other investors.
As long as you know what you are doing, I think that's the best thing to do. Because, of course, you are directly or indirectly in control of the situation, and you can influence the situation. But the normal path is that eventually, (22:00) there are not that many things that you can do so personally.
And therefore, you have to allow for a certain percentage of your assets to be invested financially in the stock markets. And over time, that percentage should increase, because of course, you are getting older, you are not able to, you don't have the stamina or sometimes don't even have the wits to really understand what you are doing.
And therefore, if you want to prepare for a smooth succession of your wealth to your children, then you have to make it liquid. You have to invest basically almost all your net worth in financial assets. And then, the question becomes how you select the financial assets that you should invest in.
And I mean, I've been looking at hedge funds since the 90’s. I've been looking at private equity, I've been looking at wealth managers and so forth. And eventually, I came to the conclusion that investing in liquid markets with a passive mode is really the best thing that you can do if you want to leave your wealth for your children, and ensure that it increases over the years, and then eventually it is passed on to the grandchildren.
(24:00) Of course, eventually, they will do what they want with it. But as long as you can get a real, in real term return of 6%, that 6% is meagre when you think.
Philipp: When you come from private equity-like you, huh?
Gianfilippo: Yes, that's right. But the fact is 6% is feasible for, and almost for anyone. And I must say that the circumstances that allowed me to make incredible returns in private equity are no longer there. Or at least if they are there, I cannot see them.
Or even if I saw them, I wouldn't be able to do it myself. And therefore, with a 6% real return after inflation, of course, and then making sure that there are no taxes involved. That kind of return ensures that you’re doubling your wealth every 12 years, so I would say that would be enough.
Philipp: Yes, absolutely. And you did mention wealth across generations, like kids and grandkids. If I back this up for a second, when you were working in private equity, I assumed since you mentioned children, you had children.
So how did you teach your children about money, and now you obviously have very successful businesses, so I assume you invest a nice net worth that you're managing, that they might inherit in the future. How did you kind of go about teaching them? Because I think there's a lot of times where a lot of issues happen, right?
Gianfilippo: Yes. But that happens when there is a family company, there is a family company making something. (26:00) Because in Italy in particular, family companies are part of the personality of the founder, and they are considered an asset; they are considered family and like the house of your grandparents.
You don't want a, normally entrepreneurs don't want to be separated from them, and they want to nail their children and grandchildren with a task of managing the family company forever. Of course, that is, in most of the cases, looking for trouble, because of course, rarely, very rarely some of the heirs of the founders have the characteristics or the ability of the founders. So normally, this way of conceiving your family company leads to disaster in 9 cases out of 10.
Philipp: And you must have seen that in your private equity business.
Gianfilippo: Yes, I've seen it a number of times. I even wrote an article once in one of the leading papers, citing very specifically making a reference to 40 family companies that had gone bust in the last 20 years.
And by talking to lawyers, consultants, accountants that were close to each case, I identified 10 root causes of the disaster.
And the first root cause is thinking that your son (28:00) can manage the family company.
The second is taking over more debt that you can really cope with. Yes, there are a number of things in that.
Of course, after writing that article, I had 40 enemies in Italy, more than the one they already had before. But they were kind of powerless because their company had gone bust. So I do believe that an entrepreneur should keep the ownership of the family company in-house, in the family, as long as there is a clear path to value creation.
But these are a path to value creation over time, bouncing against limits. Limits of capital, limits of knowledge, limits of international expansion and so forth.
So the best thing is to, the next best thing is that before you break your head into a wall because you have reached some of these limits, then let somebody else do the work that needs to be done in order to continue value creation.
Which means let a private equity take over or let an industrial player take over. And then, at that point, the family has money, and that money should be invested, as I said, in a number of asset classes.
But I believe that for the long term, the only classes you should invest in are stocks, stocks for the long run, as people will say. Because they are a hedge against inflation, they are a hedge against locations from one area of the world to another area of the world. And you surf (30:00) on the growth of the world, and the world no matter what is bound to grow, and you piggyback on it; that's a normal thing to do.
Philipp: Yes, absolutely. So then you didn't have that issue with kids taking over the business?
Gianfilippo: No, because I was forgetting to say that. In a professional, whether it is private equity or consulting, things are so personal, so specific for the person, they cannot be inherited.
When you go to a surgeon for a heart operation, you want to make sure that the surgeon is the best. You won't go to somebody who said, well, I'm the son of a surgeon, they say OK, you go someplace else.
So there was never any question of my son or my daughter taking over the consulting business; they did other things. But eventually, my son became very shrewd in investing small pockets of money and then eventually learned to invest bigger pockets of money.
And now, eventually, he will take over all the activity of investing in financial markets and in alternative assets. But always with the ratio of 90% financial markets and 10% alternative assets.
Philipp: So Gianfilippo, the last question, if you could (32:00) turn back time right and you talked to your 18-year-old self when you just arrived back in the US from your high school exchange. What would you tell him?
Gianfilippo: Well, I wrote a book some 20 years ago called, the title is Success of Others. The success of others is a lesson from consulting. And there is a section for advice to young people, and that section, what I wrote 20 years ago would be the same that they would write today. And basically, of course, you have to learn, and you have to learn internationally, you have to study, you have to sacrifice yourself and go to whatever company ensures you, ensure that you get the best learning, the best opportunity.
But it might not be your final career, but the first 10 years after college or after business school are years of learning. And while you're learning, then you have to always be on the lookout for the next thing.
What I was very late in doing was jumping from consulting to private equity. And I've seen other people do it. For instance, I'd worked with Ronald Cohen, who was the founder of Apax; he was at McKinsey.
But at the time that I became a director of McKinsey, he had already jumped ship and found Apax. Of course, being in London, he was more exposed to (34:00) alternative careers, alternative ways of becoming a financial entrepreneur; in Italy, we were kind of behind.
So at the time when we had separated the Investitori Associati from consulting, for the reason of a conflict of interest. I should have stayed with Investitori Associati rather than in consulting. So that's where the only regret is but is not much of a regret. Because I had fun anyhow. I have more than what I need to have.
Philipp: Yes, this is great. I think great stuff Gianfilippo, I really appreciate that you were able to spend the time with us today. I think there are so many good lessons. We might have to even do it again because I know we have a lot more other stories. So maybe we will get together again, but this is very interesting. I think our audience will absolutely love this. So thank you so much.
In this episode, Gianfilippo Cuneo shares how he founded the Italian office of Bain, how he led the €3 billion consortium buyout of the Italian Yellow Pages publisher Seat Pagine Gialle, and what he and Warren Buffett spoke about when they met.
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