VC/PE – The Barrett Group’s CEO Interviews Managing Director of Parabellum RE
The Barrett Group’s CEO Peter Irish Interviews Fabiano Aguilar, Managing Director At Parabellum RE As They Discuss The Challenges And Opportunities Within Venture Capital And Private Equity
Peter Irish: Hello there. This is Peter Irish here from The Barrett Group today. It is my pleasure to introduce Fabiano Aguilar, who will talk to us about the private equity (PE) and venture capital (VC) industries. Fabiano, please introduce yourself.
Fabiano Aguilar: Thank you, Peter! Thank you so much for having me. We have known each other many for years, right? But we were in Europe. I currently run two companies today. One is called Parabellum investments that makes investments in venture capital, early-stage private equity, usually early or growth stage. We do make some investments in financial services, like interest rate derivatives, power companies, and more financial biased investments and real estate. In the past few months, we have not really deployed in any capital real estate given the excessive liquidity we see in the market.
We are very opportunistic; we are value investors. As such, we tend to buy things when they are really distressed, or we tend to go against the flow as much as possible. And we are very patient as well. Sometimes we just do not deploy capital if you do not see the opportunity.
So, we do not have to produce earnings every quarter like a traditional hedge funds. This is my first job. My second job, I am the CEO of Strong Power which is one of our portfolio companies. That is where I spent at least 95% of my time. So, I have both hats. I am a capital allocator but also an executive.
Peter Irish: That’s wonderful. Thank you for your internal perspective on the industry. So, we want to talk a little bit about your business and about the industry in general. Obviously, our focus is on executives, as I pointed out to a little bit ago, we are talking about 24,000 to 25,000 executives in our relevant geography who are involved in these industries or in this segment and it’s grown by about 8%. That looks positive on the surface. Tell me a little bit the recent macroeconomic and pandemic and everything. How have these influences affected your industry or your business?
Fabiano Aguilar: Yes. So, if you think from a perspective of digitalization of the economy, it was great because it has sped up a lot of the business that were taking too long to flourish. But I think that the whole pandemic has had a huge toll on the human side. People with mental health issues, depression. We all were affected by it no matter where you live, no matter what you are doing, what impact you have in your company. So, it is a bit hard to balance those two factors.
On our portfolio companies per se, we did not see a huge impact from the quarantine from the infrastructure perspective because we were already set up in the cloud. We have had people working virtually for many, many years before.
The first impact we have seen was an increase in productivity because folks stopped commuting, they saved an hour, an hour and a half of their day, and that they put into work. But within two months, three months of working from home, we have seen that the opposite happened. We have seen a decrease in productivity. In addition, we have seen some difficulty with communication, internal sharing and it has impacted some of our businesses to the negative side. We have tried to come back. We were not located in California, which I think was the worst quarantine so far, or Argentina for that matter. But as soon as we were able to go back to the office, we did that because we thought we were losing interaction, people interaction, we were losing discussions, openness, and collaboration.
If I can go on a little bit about the industry itself, venture capital (VC) and private equity (PE) are loosely thrown acronyms at times but there is a clear distinction. Venture capital is when you create a develop an idea, product, or service, you create a beta version of that service. You hire initial staff, you test different business models, and once you find something that works, I tend to call it the trinity, the right offering, the right target clients and channels, and the best pricing, then you go for capital, growth capital. Most entrepreneurs do not get to the trinity. They “die on the beach” as they are trying to develop those products and make their companies relevant. Private equity is usually for companies that need growth, companies that have been around for some time. Either they need growth to increase their market penetration or sometimes there is consolidation in place where you get covered from different geographies in the same industry. So you build a larger plain. Or you are trying to prepare them for a strategic or IPO exit.
The U.S. is the most effective key market in the world, given the numbers that you showed me before, but you have this ecosystem where you have the banks, investors, entrepreneurs, the workforce. However, we have seen PE flourishing everywhere from all over the place, in Europe, Asia and Latin America. Local PE markets have become increasingly more effective in identifying opportunities, pricing them, and executing those deals. I think if you look from the forest, not from the trees, it is a very promising, positive message because we have been growing everywhere.
The pandemic has created a dent in some industries, especially services and restaurants or hotels, but it also helped others flourish. Most of the companies that are fully diversified, they saw a negative and positive impact in their portfolios. And now we are seeing significant growth coming out of the pandemic.
Now is the moment where not only is inflation but you also see issues with the supply chain fulfillment and prices are completely out of whack at times. But that is what is happening. If you think about venture capital (VC), Silicon Valley is still the Mecca for entrepreneurs, and the issue there is that it is still the best ecosystem for matching ideas through capital and the resources that are needed to develop them. We have seen a lot of new funds in India, in Asia especially but also Latin America. In every single country that is trying to develop the ecosystem in their own way, sometimes with the help of the government, but we have not really seen the same level of network effect that we see in the U. S. Especially in California. If I talk a little bit of trends, I am sorry, go ahead.
Peter Irish: No, it is fine! You are answering my question before I ask it. That is exactly what I wanted to ask. Go ahead.
Fabiano Aguilar: I am just trying to give you my perspective where I see this going. Venture capital and private equity, they do behave in cycles as well, like a normal economic cycle. And with the excess of liquidity coming from the central banks and from the Federal Reserve, we have seen distortions in valuations. Those are not new. They have been going on for about 10, 15 years already. There is a significant liquidity injection in the public markets. We started with bonds, but then it went to commercial paper, and then to equities. So, we have seen this situation, since 2009, 2010, where it is cascading into other industries as well.
And you see a situation where KKR and Blackstone launched private equity funds for retail investors about 10, 15 years ago. Those investments became more accessible to retail investors. And then you see a situation like Softbank launching $100 billion fund to invest in in venture capital, which is mind boggling. How can you invest a billion dollars per week? It does not make sense. We will know at the end if the fund is successful or not, but those to me are very important signals that talk of the cycle. There is too much capital chasing too few opportunities. It is a recipe for potential disaster in the next vintage funds that are starting from now on.
Peter Irish: Okay. So, if you think about how that will affect things going forward, we had some contractions in certain industries, we had an excess of capital, consumers could not spend money. There is too much liquidity. There has been all this injection of macroeconomic funds in Europe and the U.S. and everywhere else. What do you expect if you look out over the next couple of years for the industry or for your businesses, what do you expect? What will change?
Fabiano Aguilar: From an investor perspective, somebody that is trying to allocate capital to the industry, the best players are still going to produce outsize returns, but I think the average return might go down in the future. The distribution of returns might get a little bit wide as compared to the past previous years. I have seen some interesting funds. I have seen a VC feeder fund that uses AI to try to identify the best combination between early managers, best entrepreneurs, and best investors. It is like a fund of funds. They enter early in the fund, and they charge on top of that. But those are new models that used to take place in hedge fund and now it is coming to VC as well.
And I think for entrepreneurs, if you are on the entrepreneur side, it would be a bit tougher to raise capital. One of the several challenges of an entrepreneur is how do you balance running the business versus raising capital? Ideally, you should do the capital funding once and have at least two years of runway, so you can go focus and put your head down and just work hard to deliver what you are trying to do. That is not what happens. You are really trying to create a product to test it, to sell to a potential client at the same time while you are talking to investors, and you try to raise capital because you don’t have enough money to survive the next six months or ten months. It is difficult.
Peter Irish: If we think industrially a little bit about the landscape you referenced for example, real estate, commercial real estate is still in a bit of a glut situation or perhaps will be. I would be interested to hear how you feel about that. AI is all over the place and up and coming regardless of any macroeconomic effects because it can generate the efficiency, I suppose. Alternative energy, the environment – these are sectors that seem to be enormously attractive going forward. How do you evaluate the landscape from an industry sectoral point of view?
Fabiano Aguilar: Yes. We go where the IQ is. If I can find an entrepreneur with a with a remarkably high IQ and a specific theme, that is what we are going after. A generalist will never have the highest IQ per square foot on an industry. You just touch on a few of the industry to mention commercial real estate. We were very active about 10-12 years ago in commercial real estate, especially in low value areas with high traffic. We have not had one single investment in the past four or five years.
Real estate is a very local play for us. You need to understand the local needs, you need to understand the demographics, what they are evolving towards especially. There are areas where you have a multifamily still producing returns like Dallas or Houston or around Orlando in Florida. Those are areas that are cheap in nature, the lots and construction – if you can say that there is cheap construction nowadays with all this inflation, but cheaper. There is still demand for it. They are still a need. There is a workforce; there are people moving to those areas. On the multifamily side, we see still some reminiscence of opportunity. On the commercial, I think we have seen funds in New York, for example, being raised in the past year, year and a half. Just betting that it is going to increase again.
We had a situation where nobody was in Manhattan for almost 18 months. A lot of the leases were not paid or if they were paid, there was a lot of subleasing going on without contract. It was a chaotic scenario. But prices never really discounted significantly which is interesting. We are seeing a lot of money coming back and people are going back to offices in New York. And just had this amazing report from UBS yesterday on real estate and they are calling the bubble and they are trying to differentiate different cities, like Hong Kong or Munich, where the home prices have gone significantly above anywhere else in the world. Of course, other places, the U. S. and all.
But the opportunity lies in the change, Peter. I do not think I can predict the future, but we are watching it very curiously. Because the moment that you see these huge dislocations in markets, opportunities will open up. Challenges would increase, but also opportunity would open up.
Peter Irish: Well, if you can read the future, do let me know. Let us shift the focus a little bit to the executives. As you know, we help executives clarify their career tracks and then find the job of their dreams and we have been doing it for 30 years. From your perspective in your industries or in portfolio companies, what do you think the skills are that people should ideally bring to the table? What is really going to be in demand or what is in demand?
Fabiano Aguilar: Yes, I think for a lot of the very technical industries like power or media, you need specific expertise or materials, you need the technical background, you need the folks with strong background on a specific matter, coming from the very scientific universities. But those, I do not think they are scarce right now. It is always difficult to find the right people for the right opportunity. What I think is scarce are folks that can impact the business. Folks that are rainmakers, somebody that can come into a situation and review, re-analyze it, and say, “let us change direction,” or, “let us take the difficult decisions now because it will be better for us in the future.”
A lot of what I see, especially in the U.S., are CEOs who are just trying to keep the boat afloat. They are not as bold or as frugal as they should be at times. They raise some capital, they really try to use all of it and if it does not work, it is okay. Did not work, I am going to move on to the next opportunity. So, I do think there is very deep experience in Europe. I do miss some of the European managers in a way in the U.S. because of the frugality. The “let’s keep it real decision making,” and not chasing fads or not because I have the money, I am going to try my best.
When I think about profiles, some of our portfolio companies that were not doing well. Because if it is doing super well, there is a system that works, there is a process, they are hiring well, they are training well, they are retaining their people. The ones that are in transition or the ones that are suffering a little bit. What I see is I miss executives that could come in and really change the nature of the business, really impact results in a meaningful way. We do not want guardians of the companies.
Peter Irish: We hear that. And of course, this changes from time to time. During a steady state economy, you want a good steam ship captain who will keep the boat on course and make all the tiny little corrections. In a time of crisis, you want somebody who is much more entrepreneurial, less risk averse, willing to experiment. So it is that mixture of entrepreneurial versus managerial talent that you are talking about. It is having the right person in the right place at the right time.
So how about your own career? You have had an interesting career since I have known you. I hate to think how many companies you have been in. Tell us a little bit about your experience in changing careers. What were the challenges you face? How did you overcome them?
Fabiano Aguilar: I am Brazilian as you know, and I came from a very entrepreneurial family. My destiny was to stay in Brazil and work with my family. We have farms, and we worked in ice cream distribution. We had a small construction company. Early on, I decided to break with all of that and create my own path. Part of it is because it was a big family and part of it because the few experiences I had within the family business, I realized very quickly that I did not have the tool kit to become a good leader, good manager, or investor.
So, I was always searching for that next skill set to help me grow as a person and as a professional. In the early period of my career when we met, it was not so clear in my mind. I was just trying to follow the best opportunities as we go. Over time, it became clear that my purpose in life is not to accumulate wealth or become famous. My purpose in life is to grow as a person, to keep developing and to impact as many people around me as I can. Early on, I set these goals in an achievable way. I do not want to be president or senator. No, I want to impact the ones that I can touch, that I can talk to. And I have built what I think an interesting career because I have worked with a retail consortium for a while.
Then I wanted to work with hedge funds and could not find a hedge fund that would hire me. So, I launched one. I got a friend from Goldman; we launched the hedge fund and then I identified in the process a lot of incredibly talented people. They were very smart on a specific topic but could not really manage the rest. So, I created businesses around them, that is where I specialized. This way, I entered a lot of different industries. Most of them failed miserably. In the ones that survived, we tried to implement the lessons learned from the mistakes we have made before.
The way I see my career going is that I tend not to want to stay in the same industry or business for too long. My preference is to open up something new, start from a blank piece of paper all the time. As my wife keeps reminding me, it does not pay the bills to do that. So, I am trying to create some balance in that process. How do I start new businesses? How do I run them for a while and eventually make them more professional so I can step out and do something else?
Peter Irish: It sounds like you get you get bored, Fabiano, if you do the same thing all the time, right? You need to do something else and keep learning, right?
Fabiano Aguilar: I would prefer to, yes, if I could.
Peter Irish: Well, that is wonderful. Many people who come to us looking for their next step are also bored, burned out. On the other hand, some other people have never looked for a job in their life and they do not know how to do it. There is quite a spectrum. What advice would you have for executives right now who are contemplating a change for one reason or another? For example, maybe they have been downsized, or maybe they are facing a glass ceiling, or they are bored?
Fabiano Aguilar: I think what you do has a significant amount of value for individuals but also for industries. Because I think some people have a lot of difficulty making that change, making that switch on their own. Especially in a world that is in constant change, constant dislocation of everything. I think if I am an executive right now and I am thinking that maybe it is time for me to look for something else. Maybe it is time for me to rethink my purpose.
Or, if I am in the middle of an outsourcing downsizing, I would start with actually hiring someone like you because you have been on both sides of the spectrum. You have been an executive before and have dealt with boards. You have dealt with company dynamics. I do think that the shift of employment today, it is just too significant for some folks to deal with it alone. I have a lot of friends that suffer from that. Especially if you have been in a large company in a leadership position for too long. You have never looked for a job before. Going out there is very scary because a lot of this has changed. So, you need some help, either with an outplacement company, with coaching, or friends. But it is something that I would strongly advise folks to do.
On the other hand, I also think companies like mine need more of you as well because sometimes the hiring decisions, they are not as smart or effective as they should be. We have not really tapped into the outplacement industry as a source of talent in the way we could. You are already being paid by the executive, you have a pool of talent, why not just plugging into that and saying, you know what, this is what we need today.
Peter Irish: Well, we think that would be a good idea too, of course. Fabiano, we touched on one other aspect that affects a lot of industries. We do regular industry updates on various industries. And I have looked at, for example, information technology, manufacturing, health, consulting, and a number of others, big tech, and now venture capital and PE. One thing I do see is that the female share of executives is much lower in most industries than the population. I wonder if you have any perspective on that. How can that change – how should that change? How will that change?
Fabiano Aguilar: Unfortunately, that is true. And I am mind boggled by the fact that we do not see a lot of females in leadership positions. I have where I worked and where I had an impact, part of my goal was to transform that from within the company. With WWRE, when I oversaw the European office, I came in, it was about 20% women. When I left, it was about 50%, and not because we fired the men, but as we grew, we tried to find the best women. And it was not because I believe is the right thing to do or social minded, it was very selfish.
It is because I believe that when you have men and women in the in the meeting room, you have the best decisions. You have a different perspective. It was super selfish for me to do it. Where I am right now, Strong Power, we just promoted a general manager which is a woman. I understand why those figures are there. I do not agree with them because I think the companies need to be more flexible to accommodate to certain things.
For example, men and women are quite different. If I present an opportunity to a man that is not prepared to take it, his answer invariably will be, “Of course I can do it. Yes, send it to me and I’ll make it happen.” Almost irresponsibly. And a woman, if you present the same opportunity to a woman that has the skill set to do it, she will question herself. She would say, “You know what? I really want to do this perfect job, but not sure if I can. What do you expect?” She is always trying to size up the difficulty before jumping on board. And I am being very mean, biased, and generalizing, but that has been my experience. The women, they are more fact based. The men are more opportunistic.
The other aspect is just family. The family structure is making sure that when they want to have their families, when they want to get pregnant, but that they have a working environment that allows for them to do both. If they want to take some time off and not lose the opportunity, but also when they want to come back create flexibility around the new moms especially. At our age it is different. The kids do not want to see us anymore so we can work full time. But especially in that transition, most companies are afraid to invest in women for leadership roles because of that. It is a big mistake, and they are missing out.
We are not doing that. Instead, we are trying to create an environment where women can go out, have kids, come back, transition slowly, transition fast, however they want to do it. We want them in the meeting room, we want them in the world.
Peter Irish: We need more like you obviously. Any parting words of wisdom for executives considering the change about your industry or your skill, perspective, or anything.
Fabiano Aguilar: The first thing I do when I have changed ahead of me, is a little bit of what Confucius used to say, first you fix yourself. Try to work on your priorities, try to work on your purpose, individually. Then you fix your family, then you fix your village, then you fix your country. I would start with a very intimate review of who you are, what you have done, where you want to go. One of the things that excites you, but also what is your purpose. From that, opportunities will flourish – or not, depending on what you are trying to achieve.
Peter Irish: That’s wonderful. You have just described are Clarity Program, which is the initial stage of our career change process. We call it the Targeting step. That is exactly what it is. Well, thank you very much. It was wonderful talking with you today. Thank you for all your enthusiasm and wisdom and take good care, Fabiano, and we look forward to staying in touch.
Fabiano Aguilar: Thank you very much, Peter. Very nice seeing you.