00:00:00
And if you look at private equity, pull
00:00:01
up that chart I had there. This is just
00:00:04
stunning how big this industry is
00:00:07
getting. You know, $5 trillion is what
00:00:10
we're up to here. And it just keeps
00:00:12
growing.
00:00:12
I I think private equity is totally
00:00:14
screwed. I I don't think Silver Lake or
00:00:16
Infinity or this deal
00:00:19
are screwed, but I think private equity
00:00:21
in general is totally hosed.
00:00:22
All right. Well, it's gotten huge just
00:00:25
since 2015 and tripling in size. So why
00:00:29
is this I guess my question for the
00:00:31
gentleman here and for the audience why
00:00:34
is private equity becoming so large and
00:00:37
what impact does that have on society if
00:00:41
people can't put EA into their
00:00:44
retirement account? They can't put
00:00:45
Stripe into their retirement account. If
00:00:47
we take all the great companies and we
00:00:49
start to privatize them, SpaceX never
00:00:51
goes public. What impact does that have
00:00:52
on people's retirement accounts?
00:00:54
Okay, look I think I think the history
00:00:56
of this is important. There was a
00:00:58
long-standing belief that the best way
00:01:02
to generate the best risk adjusted
00:01:05
return. What does that mean? That means
00:01:08
to manage through periods where the
00:01:10
stock markets go down and to manage
00:01:12
through periods of volatility. The best
00:01:14
way to do that was to have what's called
00:01:16
a 60/40 allocation. 60% to bonds and 40%
00:01:20
to equities. Over many years, especially
00:01:23
when we artificially suppressed rates at
00:01:26
zero through Obama, a lot of people
00:01:29
started to move their allocations away
00:01:31
from 60/40 and they started to make more
00:01:33
and more investments further out on the
00:01:36
risk curve. The biggest beneficiaries of
00:01:38
that were venture capital, private
00:01:40
equity, and hedge funds.
00:01:42
The thing with private equity is that
00:01:45
because rates were zero, they had an
00:01:47
infinite amount of borrowing capacity,
00:01:50
had very little downside to them, and so
00:01:53
they were able to manufacture returns
00:01:55
much faster than venture capital and
00:01:56
hedge funds could. So, as a result, you
00:01:59
had an initial group of people that were
00:02:01
defining the asset class, making a ton
00:02:03
of money, and then you had all these
00:02:05
fast followers that said, "Well, if
00:02:06
they're doing it, I can do it, too. So
00:02:09
far, so good." But then always what
00:02:11
happens is then you have this flood of
00:02:14
lagards that just flood the zone. And
00:02:16
it's these lagards that make it very
00:02:18
difficult to generate returns because
00:02:22
they start overpaying for assets. They
00:02:24
start mismanaging and undermanaging the
00:02:26
assets that they do own. And so where we
00:02:29
are is that private equity has seen a
00:02:31
very consistent way of returning money
00:02:34
to help improve that 60/40 portfolio. as
00:02:37
a result they got a lot of money but
00:02:39
then that created a lot of competition
00:02:42
and so that's why you see this hockey
00:02:43
stick graph Jason and when you see that
00:02:45
kind of graph
00:02:47
it doesn't matter what asset class it is
00:02:49
the returns go to zero and so we've seen
00:02:52
this in venture capital
00:02:53
we've seen this in hedge funds
00:02:55
and we're now going to see this in
00:02:57
private equity
00:02:58
too much money going in to be clear what
00:03:00
you're saying means you kind of exit it
00:03:03
right there's there's no returns and so
00:03:05
again I've said in any of these
00:03:07
alternative asset classes, there's only
00:03:09
one thing you should always ask if you
00:03:10
had to have one critical question.
00:03:14
What are your distributions?
00:03:17
Don't show me your IRRa. What is your
00:03:20
DPI?
00:03:21
The distributions on your paidin
00:03:23
capital. And if the answer is zero,
00:03:27
then it is a very challenged asset
00:03:29
class. And what I will tell you in
00:03:31
private equity is that over the last
00:03:33
four or five years,
00:03:35
distributions have been few and far
00:03:37
between.
00:03:39
So I think what's going to happen is
00:03:41
that the money is going to come out of
00:03:42
private equity and it's going to get
00:03:44
concentrated into the few companies that
00:03:46
know what they're doing of which
00:03:49
Silverlake has generated over you know
00:03:51
the last 15 20 years
00:03:54
tens and tens of billions of dollars of
00:03:56
distributions. They are just an
00:03:58
exceptionally well-run organization.
00:04:01
They've done these huge buyout deals
00:04:04
successfully before. So, we need to go
00:04:06
through that in PE. Where does the money
00:04:08
go? The money's already leaked into
00:04:10
private credit, which is the next big
00:04:12
bubble that's building. It looks like
00:04:14
this chart that you just showed,
00:04:17
which is loaning businesses money. You
00:04:19
know, it's super interesting because you
00:04:21
make such a good point. What we're
00:04:23
seeing in private equity is these
00:04:25
continuation funds. Now continuation
00:04:27
funds are coming chimoth to venture. So
00:04:30
I've been getting pitched on these
00:04:31
continuation funds where like hey take
00:04:32
all your assets sell it to a new group
00:04:34
of people and then reset the clock and
00:04:37
then there's never an exit. The good
00:04:39
news is I will say the last year we've
00:04:42
seen a lot more activity for shares of
00:04:45
our companies that are still private. So
00:04:48
the secondary market freeberg is coming
00:04:50
back in a major way. But I do get
00:04:52
worried about these continuation funds
00:04:54
because now you're just moving an asset
00:04:56
from one class to the other and we need
00:04:58
to have a functioning IPO market. How
00:05:01
functioning is the IPO market today?
00:05:03
Would we say it's completely
00:05:05
dysfunctional?
00:05:06
How dysfunctional is the IPO market? Let
00:05:08
me say it another way. And and how do we
00:05:11
correct that? And this leads into your
00:05:12
new spec.
00:05:13
Look, there are three ways to go public.
00:05:15
There's the traditional way IPO,
00:05:18
there's the direct listing, and then
00:05:20
there's the reverse merger or the spa.
00:05:23
Up until I floated IPO A in 2018, I
00:05:28
think it was the first way was really
00:05:30
the only way.
00:05:33
I was involved in two direct listings,
00:05:35
Slack and Coinbase.
00:05:38
And in both of those, what I learned is
00:05:41
that, you know, it has the same vagaries
00:05:44
as the traditional IPO. So in the
00:05:45
traditional IPO, you go to a bank, they
00:05:47
underwrite you, they act as a
00:05:49
gatekeeper, and they take six, seven, 8%
00:05:52
fees as a result, and then they allocate
00:05:55
what is essentially underpriced stock to
00:05:58
their best customers. Then you see a
00:06:00
one-day pop, maybe a two or three day
00:06:02
pop. All of those customers tend to
00:06:05
unload and then the stock tends to drift
00:06:07
down. So the IPO is expensive and it
00:06:10
typically is mispriced.
00:06:13
The direct listing
00:06:15
you have a different dynamic which is
00:06:16
the first trade is always the highest
00:06:18
trade and then it just goes straight
00:06:20
down. That happened with Slack and it
00:06:22
happened with Coinbase. So
00:06:24
Spotify would be in that group as well.
00:06:25
Yeah.
00:06:25
Yeah. With Slack I remember like I I was
00:06:27
like offside a billion dollars and I was
00:06:29
like well I'm never letting this happen
00:06:30
again. And so when I had the Coinbase
00:06:32
thing, I sold it the first day. And I
00:06:33
texted Brian. I said, "This is not a
00:06:35
directional indication of your company.
00:06:37
It's the dynamics of the direct listing
00:06:38
because I learned it the hard way that
00:06:41
the time to sell is on day one." So
00:06:44
where does the spack come in, you know,
00:06:46
especially now in version two? Version
00:06:49
two being the the thing that I have been
00:06:53
tinkering and refining with and am
00:06:55
trying to push in in this new version.
00:06:58
I think that it's creating an incredibly
00:07:01
competitive vehicle where you can have a
00:07:03
ton of money go into these private
00:07:06
companies, take them public at a very,
00:07:08
very low cost of capital. And I think
00:07:10
that that's should be very enticing.
00:07:13
So, you closed your financing. Can you
00:07:15
just tell us what the capital raise was
00:07:17
like as you went out and met with folks?
00:07:19
What do you hear?
00:07:20
Yes. You know, Nick, maybe you can find
00:07:23
it. You know that image of the Raptor
00:07:24
engines?
00:07:26
Yes. super complex to being elegantly
00:07:28
simple.
00:07:29
Yeah. Nick, can you can you maybe just
00:07:30
throw that up? What I would say is like
00:07:32
Spack 1.0, of which I was, you know,
00:07:34
right in the front of the parade, had a
00:07:36
bunch of misfires and it was
00:07:38
complicated, but it worked. There were
00:07:40
some hot fires that worked, but then
00:07:42
there were some clear misfires. And the
00:07:45
whole point was to prove that you could
00:07:46
create a competitive alternative to the
00:07:48
IPO. The thing that I'm the most proud
00:07:50
of quite honestly is
00:07:52
for all intents and purposes I started
00:07:56
a normalization of this vehicle that's
00:07:58
now raised more than 1502 200 billion
00:08:00
dollars for American companies. I am
00:08:02
very proud of them. That's an important
00:08:04
thing for the American capital markets.
00:08:06
I think what we did in American
00:08:10
exceptionalism is Raptor 2. It's not yet
00:08:13
perfect, but I do think it tries to
00:08:16
improve on the things that I noticed was
00:08:17
not working in Raptor 1. And in that is
00:08:21
a lot of the compensation and
00:08:22
incentives. And so when I showed that to
00:08:25
investors, they were quite excited. I
00:08:27
think that they want a competitive IPO
00:08:31
market that brings many many American
00:08:34
businesses to the public market so that
00:08:36
they can be owned by everybody, the
00:08:38
transparency they like, and the fact
00:08:41
that the incentives are such now where
00:08:42
there's absolutely no compensation
00:08:44
unless this thing really works. And
00:08:46
historically they received warrants in
00:08:49
the company typically with a strike
00:08:51
price of 1150. So 15% above the issue
00:08:54
price of the stock
00:08:55
and founders shares that were basically
00:08:57
and there was founder shares. But like
00:08:58
did you have a reaction from them saying
00:09:00
hey we want some
00:09:02
warrants we we need a little extra
00:09:04
kicker here like there's some sort of
00:09:06
desire for that.
00:09:07
No in fact it was the opposite. I think
00:09:08
that the institutional investors and you
00:09:11
know my investors in this 98.7 of the
00:09:14
capital was allocated to these guys are
00:09:18
the best of the best. You you know who
00:09:19
they are. So they're every single blue
00:09:23
chip A+ institutional investor and what
00:09:27
they wanted was great companies. They
00:09:30
want great companies to be public and
00:09:32
the reason is the thing that Freeberg I
00:09:34
think you mentioned this before. When a
00:09:36
good company gets public, the amount of
00:09:38
money that they can raise in the publics
00:09:40
and then the amount of growth that they
00:09:42
have in the publics far outclasses what
00:09:45
they'll ever do as a private company.
00:09:47
And so they want the simplest and
00:09:50
cheapest way of great businesses to get
00:09:53
out. Jamat, do you think that the
00:09:56
transaction when you find a merger
00:09:58
partner, the traditional spa has been
00:10:02
announced as a merger concurrent with a
00:10:04
pipe being done where new investors are
00:10:06
underwriting the valuation of the deal
00:10:09
and saying we like this company at this
00:10:11
price cuz we are now going to write
00:10:12
money in in the form of a pipe and
00:10:15
historically the pipe was for common
00:10:18
shares. So it kind of was like this is a
00:10:20
good price and everyone felt good about
00:10:21
it. Number one, do you anticipate that
00:10:24
there'll still be a pipe being done in
00:10:26
concurrent with the merger and this
00:10:27
transaction? And then number two is do
00:10:30
you think it'll look like a common pipe?
00:10:31
Because after the spa frenzy died down,
00:10:34
in order to get deals done, the pipe
00:10:36
started to get done with convertible
00:10:38
preferred securities. So they were
00:10:39
senior to common and they almost were
00:10:42
like dead. How do you think this is
00:10:43
going to play out? because a clean deal
00:10:46
has not happened in quite some time
00:10:48
where a spa has announced a merger and
00:10:51
simply raised money via common in the
00:10:53
form of a pipe.
00:10:54
It's a great question. I think it comes
00:10:55
down to the underlying asset, but there
00:10:57
are some incredible companies that are
00:10:59
private
00:11:01
that if they go public
00:11:03
will be able to demand
00:11:06
common pipe capital. I think that the
00:11:09
future maybe just prognosticating and
00:11:11
guessing what does Raptor 3 look like in
00:11:13
this back. I think the Raptor 3 will
00:11:16
look like where somebody a sponsor like
00:11:19
me rolls everything up into one thing so
00:11:22
that it's already pre-wired from the
00:11:23
beginning where I'll just speak to
00:11:27
a billion, two billion, three billion,
00:11:29
whatever it is, flexible capital that
00:11:31
can come in as common so that it's a
00:11:33
totally pre-baked IPO
00:11:35
at a very fair price. I think that I
00:11:37
think that that's what the Raptor 3
00:11:39
version of a spa will look like.
00:11:40
So more capital and then they they put
00:11:42
their full trust and faith in the
00:11:43
sponsor to run the deal. Well, no then
00:11:46
no meaning then there's no conversion
00:11:47
risk that all the money comes over right
00:11:49
from day comes over right and so then
00:11:51
you have to fully commit
