Within the motorcycle industry, Asphalt & Rubber has earned itself a reputation for breaking stories from our so-called “Bothan spies”, as insiders often tip us off to intriguing stories and happenings in the two-wheeled realm.
Just a few weeks ago, we got one of those interesting tips, one that said that Dainese was being put up for sale. So, we called the bossman himself, Dainese CEO Cristiano Silei (an announcement too that A&R was able to break because of our Bothan spies), to see what the story was all about, and indeed if the rumors were true.
The call resulted in a terse answer, and perhaps an expected response, but Silei also provided an interesting explanation of Dainese’s current investment position, and what results the company has seen since its purchase three years ago (another story that our Bothans were first to get the word on).
“Rumors are rumors, which means that is not the case. Dainese is not for sale,” said Silei, flatly. “It [Dainese] is progressing in its development path after being part of Investcorp since the beginning of 2015, and we keep going – very well actually.”
Not leaving too much room for ambiguity in his response, Silei then turned to explaining in detail the relationship that Dainese has with its owners, Investcorp – a publicly traded Bahraini investment group, with an estimated $26 billion in investments under management – which bought 80% of the company back in late-2014, for €130 million.
“In general, Investcorp is quite a peculiar investment fund. Actually, it is not an investment fund, per se. It’s a provider of a series of investments vehicles for their investors, of which private investment is one of the options for its clients,” explained Silei.
“When it comes to private equity, the philosophy of operating the fund, for example, it’s not a fund. They do invest on a deal-by-deal basis, which means they buy their assets on their own – so with their own financing – and then they syndicate the investment with their clients, on a deal-by-deal basis, which means you might have investors investing in one company, and not partaking in another one.”
“Now, why is that important? It is important because as Investcorp, you will have every different deal you do with a different client base, then make sure that every deal has to be successful.”
“You cannot average out as normal investment funds do. Normal investment funds have five to ten companies within a fund, and then some of them will go well and some of them won’t go well, what matters is the average return.”
As Silei points out in his explanation, the way Investcorp operates is very different from what we would typically call a private equity fund operates. Investing first in a business, and then looking for clients who want to be part of the investment is basically the reverse of how private equity usually works.
For an example of this, we can use the case of Zero Motorcycles, which is owned by the private equity firm Invus. Based out of New York, Invus is primarily funded by several wealthy European families, most of which are from the Benelux region.
These families, and other investors, front the capital that Invus uses, and then turns around and invests on their behalf, with the aim on providing a substantial return on that investment.
In this model, the investors don’t necessarily care how a company like Zero Motorcycles grows and performs, so long as the aggregate of the companies Invus invests in return a healthy profit (10% year-over-year growth would be a typical goal, though one that is thought to be impossible to sustain).
As Silei explained though, Dainese’s owners work in a different way within their investment firm, with each investment having potentially big consequences for investors.
This shouldn’t diminish how much a company like Invus cares about the results that Zero makes (or doesn’t as the case may be), but instead shows how much more is on the line for a group like Investcorp, in terms of Dainese’s individual results.
It is an interesting contrast, from a financial point-of-view, but it also has consequences in how Investcorp handles its investments, like Dainese. Silei continues: “For Investcorp, it is a different story. Every single deal, ideally, has to be a good deal.”
“Now, that brings itself a different philosophy on which kind of companies they buy, how they help management to develop, and what kind of leverage to put on the company.”
“So in our case for example, no financing leverage has been put on the company. No debt, to give an example.”
If I can interrupt again, this is another interesting point, and we can make another contrast within the motorcycle industry with it. To investment firms, companies are like any other asset that can go up and down in value.
Typically, investment groups look to buy companies that are set to grow. This is what Investcorp is doing with Dainese, and it is what Invus is doing with Zero.
For Investcorp, they are hoping that Dainese will grow to be a bigger apparel brand in the action sports sector, like riding motorcycles. For Invus, the goal is more lofty, with the hope that Zero will be part of the larger transition to electric vehicles.
But, some investment groups don’t care too much about growth. Instead, they are looking for brands with strong revenues, which they then use to borrow large sums of money with. Think of it like putting a mortgage on your house: the bank gives you a loan, because your house is worth a great deal of money.
In the case that Silei is alluding to, banks will loan investment groups money based on the earnings created by the companies they own (here, earnings replaces the house, in my mortgage analogy). This was the case with the Motorcycle Aftermarket Group (MAG), which leveraged its house of brands to get a sizable amount of cash in loans from large banks.
For MAG, things went south fairly quickly, and the conglomerate is currently in bankruptcy proceedings. Many of the brands it owns are having to go through bankruptcy as well, since each company was jointly and severally liable for the debt.
As we can see from the MAG Group, this type of operation can place a huge burden on a company once it is acquired, and I have heard similar stories about how Dorna, the MotoGP rights holder, is burdened by debt that its ownership group has put on the company’s balance sheets, by using its revenues to secure larger loans.
The practice isn’t necessarily a bad one, despite how it sounds, because an investment group can expedite its growth by borrowing money, especially if interest rates are low. For instance, borrow money at 5% interest can be a really strong move, if you rate of return is 10%.
Where investment groups get into trouble though is when their debt-to-equity ratio gets too large to manage, in which case profits start paying only interest on the debt, instead of the principal amount, or worse, the profits don’t cover either.
Similarly, having debt put on the books can also hamper the moves that company can make in their own business ventures, since their profits are serving another master, rather than helping fuel the company’s own growth.
As such, for Dainese it is refreshing to hear that the company is free from such constraints from Investcorp, and that by the most basic of numbers, the company seems to be growing.
“[Investcorp] tend to buy the companies they believe to be on a growth-path, so they invest in growth. They don’t invest in the other kind of philosophies, like restructuring, for example, and Dainese perfectly fits into this investment philosophy.”
“They bought two phenomenal brands, with an amazing potential for growth, and then they supported the new management team, in this case me, to help the company continue to grow. Which is exactly what we’ve done these past three years.”
“We have doubled the size of the company, the business. We more than doubled EBITDA (Earning Before Interest, Taxes, Depreciation, and Amortization).”
“We are growing in all categories, in all countries. We are investing quite a lot in new product development. And we somewhat brought a modern layer of managing the company, which was missing when I got here.
“This is only the beginning of the process. We are just at the early stages of what we are doing.”
As for the rumors, despite Cristiano’s very clear denial at the beginning of the conversation, the gossip keep circulating even after our interview, with talk of a possible initial public offering (IPO) on the Italian stock exchange. Smoke or fire? As always, time will tell.
Source: Bothan Spies; Photo: Dainese
You can hear the audio from this full interview in next week’s MOTR Podcast.