Permira’s co-CEOs Brian Ruder and Dipan Patel: We see interesting opportunities for take-privates

Speaker A: Hello, my name is Stefan Pauls and I am the CEO and founder of Moonfair. Welcome to Dealtalk where we bring you face to face with the top minds in private equity. Moonfair is the largest digital platform for investing in private equity. We offer carefully curated funds with remarkable low minimums. Joining our community of world class investors is free and only takes a few minutes. We do this to give more investors direct access to one of the most attractive global asset classes. With our Dealtalk webinars, we aim to democratize access to the knowledge surrounding it. Enjoy a very warm welcome. My name is Steffen Powelts and I am the founder and CEO of Moonfare. I'm delighted to welcome you to our deal talk series today where I have the pleasure to interview some of the most influential dealmakers in the private equity world. Today I am excited to be joined by two exceptional investors, Brian Ruder and Deepan Patel, the recently appointed Co CEOs of Pamira. In our industry, very few firms are, are as renowned as Pamira. Founded in 1985, the firm has invested around 75 billion in hundreds of businesses worldwide. It's a platform that covers of course large cap buyout, but also growth equity and credit products and is thereby covering the full risk reward spectrum. On the private equity side, the deals include household names like Golden Goose, a company I am very familiar with because of my three daughters, Altadomus, Klarna, Genesis and Cadreon, to name a few. Truly an impressive portfolio supported by a highly accomplished team. And there's no one more qualified really to discuss Pamira's, uh, strategy and market insights than Brian and Deepan. So thank you both for joining us today and thank you for hosting us here, uh, in your offices in London.

Speaker B: Our pleasure.

Speaker C: Thanks for having us.

Speaker A: And so first, congratulations to both of you, to your recent promotions to become co CEOs of Premier. Obviously a great milestone for you personally, but also for the firm in general. Look, the co CEO model is still relatively uncommon, though I am pretty familiar with it from kkr where from the very beginning with George and Henry, we are two CO CEOs and they are pursuing the same uh, model still. By the way, uh, personal note, at Moonfair we also have two co CEOs running the business. Uh, and you have a history here as well with Kurt, Kurt Bjorkland and Tom Lister, who co managed the company together until Tom, uh, recently a few years ago, then retired. So how are you thinking about the advantages of being co CEOs?

Speaker C: Yeah, they, well they say it's Lonely at the top. So this is an easy solution for that. But uh, we actually like the co leadership model across a lot of what we do. Uh, so most of our sectors and we're a sector led firm in technology, consumer healthcare services, increasingly climate and growth. Um, most of those are co run and the reason we like that is a few fold. Um, mainly it's because we're a team of peers and the process of leading for us, or kind of the art of leading in a lot of ways is how do you make high quality decisions in a reasonable period of time. And we found that in many cases the co model actually makes better decisions faster. I can say for myself personally, having co ideated and led deals with this guy for decades plus, um, that we just make better decisions when we're able to challenge each other and kind of give each other ideas. Um, and that works across our sectors and we think it works at the firm level as well.

Speaker A: I guess it's a true expression of a partnership model which you are obviously running at Pamira. Look, Brian, you started your career in the mid-90s in private equity and Deepan, you joined the club a little later. Uh, both when private markets were very different from what they are today. I remember my early days at kkr. It was a niche industry. Today private equity stands for some 25% of global material and became a mainstream force of the economy. Um, look, growth, uh, in private equity has been phenomenal obviously over the past 10 years. And there are many reasons for it. Uh, one of course is the opportunity set in private markets, which is some 10 times larger than in public markets. Then interestingly, a statistic that always seems surprised me is that the number of IPOs is actually going down since 2000 if you take, uh, public data, uh, from these days. So what makes you confident after this phenomenal growth rate that we have seen over the past decade, um, which, you know, what will be in the next 10 years? Will we be able to sustain those levels? And if so, what do you think? Where is the growth coming from?

Speaker C: Yeah, I mean in the mid-90s as you're talking about, I was at Hellman and Friedman, where I started my career. And the fund we were managing at the time was one and a half billion dollars. And that was kind of the, that was the edge of the curve of how big private equity firms and we stressed actively about whether the industry would be able to support real growth from there because that felt like a very big number at the time. And of course fast forward to today and the biggest Funds in the world are more than 10 times that size, uh, and growing. And so there's a has it grown and can it continue to grow? The real question is why has it grown during that period of time and do we expect those trends to continue? Because we do. Um, the big reason that private markets have been so successful is they offer something that the public markets don't offer. And they have some drawbacks to the public markets too, or private equity ownership does. The main thing it offers is uh, very high alignment and uh, very high kind of control and direction as a part of that and kind of how the business operates. And then very importantly flexibility, uh, on timeframe. So uh, you can invest in private markets as we do frequently with a 10 year plus horizon on how to drive value in a business. It's a very hard thing to do in the public markets that increasingly want to see quarterly progression on pretty much every initiative. It's very hard, absent a controlled public company, to do kind of large investments that don't pay off and kind of don't lend themselves to quarterly monthly, even annual tracking at some times. What private equity has lacked that the public markets offer is really liquidity. And the interesting thing about that is that the growth in the industry kind of becomes a self healing problem in that the larger the industry grows, the more it provides liquidity to itself. And so increasingly private to private transactions between private equity firms are very, uh, much expected and a source of a lot of the volume in the industry. And we think that's going to continue. Um, so private equity sort of solves its drawbacks as time goes on and it retains these phenomenal advantages in terms of the governance model of what private equity can offer, both in terms of directed control investing, but also um, flexibility on the time frame in which you invest. That's going to be true over the next 10 years, as it has been for the last 10, 20 years.

Speaker A: Yeah, look, and uh, what you're saying, Brian, is obviously resonating with me, but not only with me, but also with academic research, uh, about private uh, equity. Where are the returns coming from? Its active ownership is the superiority of the governance model, uh, and all reasons you stated. And then the industry is developing further, as you rightly say, continuation funds or generation funds, um, and more and more is happening in the private world of things. Look, I've heard you describing Pamira's private equity business as a growth investor with a buyout mentality. Could you explain what you mean with that?

Speaker B: Yeah, sure. I mean, I think we probably would refer to Ourselves more as a buyout investor with a growth mentality. And um, I think one of the first questions that we ask ourselves in any business that we back is what is the maximum efficient revenue growth for that business? And most of the industry focuses on what's the maximum margin you can take a business to and you know, in practice, what does that mean? It means in boardrooms you'll typically be the premier people pushing management teams around, making the kinds of investments that often lead to short term EBITDA depression. But create optionality at exit. And we've just like our lived experience over a number, a number of years is that's always a good trade to make. New products, new channels, new geographies, they often cost money, um, they're often better done early in the investment horizon, um, but by the time you get to exit you end up having a much better invested business. A lot more optionality, um, and often that translates into better exit multiples. If you look at our portfolio today, we've probably got 50 to 55 portfolio companies in our flagship fund. Um, and that's ranging from Premier 4, which is a 2007 vintage, all the way up to Premier 8 which we're investing out of at the moment. And the LTM revenue growth uh, is low double digit across that portfolio and the EBITDA is mid teens, um, and that's not an anomaly. In fact it's usually low double digit to mid teens. Our revenue growth that's quite a spread to most of the industry. I was with a well known GP earlier this week and they were telling me that their uh, Q3 year over year growth across their portfolio was 5%. So very different kind of growth rates to where the uh, Premier portfolio is. And it's pretty hardwired into uh, the way that we think and do things.

Speaker A: Look, let's uh, switch gears uh, a little. Um, and despite all beauty about our industry, the private equity industry has been facing quite some challenges over the past 24 months. If you think about financing costs, uh, lack of distributions, uh, lower, uh, deal activity, although it's picking up more and more. Um, how have you as a firm adapted to these changing market conditions and where have you still found opportunities?

Speaker B: You know, we work in such an interesting industry. You only really know what a challenging vintage was. A period was five, 10 years down the road. Looking backwards, um, we have, you know, broadly there are three parts to the business. There is the investing side, new investing, there is value creation and then there's exits. Um, actually the most challenging period from an investing Perspective and from a value creation perspective was probably in 2020, 21 it was very hard to find really good risk adjusted returns. And then from a portfolio perspective it was hard to um, attract talent, it was hard to do add ons at sensible prices. Um, it was just generally a quite hard environment for creating value. If you look at this period, uh, let's call it broadly the last couple of years post 2022, correction, uh, it's been easier to hire talent into our companies. Um, it's been easier to do add on acquisitions. Um, it has been uh, easier to have sensible conversations with management teams around growth versus margin trade offs. Um and then from an investing perspective we, you know We've invested in 10 names in Premiere 8, uh, the vast majority nine. Nine out of those 10 have been bilateral deals and that's something we haven't been able to do in that much densities going back to probably Premiere five, which was really a number of years ago now. Um, so the, the, the investing environment, probably the valuation environment has been actually quite good. And I think when we look back on this period we'll probably think that it was probably quite a good vintage. It wouldn't have felt like a good vintage, um, but it I think will turn out to be a good vintage. The harder part has been exits and it was much easier to sell businesses of course in 2020, 21. Uh, the last few years has been much harder and it's an interesting world we sort of live in. If you think about the private equity industry, you've almost got forced sellers and forced buyers but not that much activity happening. And um, I think that's been the tougher part. I think you've got A grade businesses, uh, they're always sellable. So like A grade businesses are sort of, they've never been cheap, they're not cheap and will never be cheap. B and C grade businesses I think where the pain is and there's an awful lot of that sitting in people's portfolios and I think that's where it

Speaker C: will get, it'll get harder maybe to add just the. I think you asked about interest rates too. We think that actually the period that we've been living in the last couple of years with higher rates in a way is back to what private equity always lived with. Uh, and so I think that's actually been a healthy change to what was a very unusual 15 plus year period where you basically had no cost of debt. I mean we have more than half of our organization never knew the kind of pre 2008 time period when you had to consider things like cash interest coverage ratios, fixed charge coverage ratios, when you considered how much debt to put on a business. Now we're growth investors so we never over lever our companies. But um, we do use debt. Debt is a phenomenal way to boost returns, uh, especially in the private markets, which will support much higher levels of healthy debt than the public markets will. But um, the return to real cost of your debt we think has actually generally been a healthy thing for the people to learn in the organization, really grow as investors, but also to be a bit more disciplined about how organizations are allocating capital.

Speaker A: Look, absolutely, Brian. There's a funny discussion I had, uh, very recently with one of the very senior private equity leaders in the U.S. and he said to me, the past 10 years or before the past two years, uh, have been just abnormal honeymoon time for everybody. And uh, he literally said that's a quote. Uh, I don't even still know whether my investment team are really good investors because the time was so unusual. And now we are back to normal and not to abnormal. Look, talking about interest rates, you said it uh, a couple of weeks ago. Obviously, um, the Fed has cut, uh, rates. The ECB has done so earlier this year. Probably there will be more cuts to follow, uh, which is obviously good, um, that the financial conditions are uh, improving. Having said that, there's a study from Bain that came out um, a couple of months ago where they say there's a time lag between interest rate cuts until they really hit, so to say, the private equity world in terms of better, uh, environment. So what are your expectations now, uh, in light of these, uh, rate cuts for uh, the next 12 months? And what level of activity do you anticipate?

Speaker C: Oh, uh, we think the rate cuts, beginning of rate cuts are a good thing. Not based on a principal decision, but from what we see, we have a really interesting signal that comes from our portfolio all the time. So the way to think about our large portfolio, which is around 80 companies, it's around 100,000 employees, kind of through all that that sell to customers that have millions and millions of employees of employees. And so we get this very routine kind of monthly signal coming from them in terms of purchasing behavior, renewal behavior, pricing behavior and the like. And we had begun to see, um, quite a ways back. Now it's going back three, four quarters, um, not in our companies, but in our company's customers, a significant contraction in their own hiring. So our company's customers were hiring fewer people. And so we're starting to See some of the job pressure and now maybe that's started to reverse a little bit. But it did feel like what we're seeing is it was time to see a little bit more easing. So um, from a defensive standpoint, that feels like the right answer in terms of how it's going to impact us. Um, the credit markets have already been super healthy and the difference on leverage in a transaction is rarely the cost of that debt. We talked about it some good discipline to having real interest cost to when you borrow money in terms of being sure that you're not over leveraging the house to create those situations. We have real stress. But just because rates come down isn't the thing that suddenly drives the credit market to be a real game changer for private equity. It's really when you can, when is the availability of credit to be able to support those transactions. And that's been really good actually for quite some time. It's been really healthy credit markets that we've seen support supporting really any of the transactions that we've been able to do. So the rates coming down is kind of, it's a nice little boost to our business in the short term, but it's pretty minor. To your point though, the impact that it's going to have in terms of markets because lower rates generally result in higher multiples. We think that's been a uh, significant expectation of rate decline. Has been in the public markets for some time. It's pretty hard to find a period of history actually the, the last one is right before the financial crisis where you had multiples that were this high with interest rates that were this high. So it's a pretty um, it's a pricey time. So like those multiples, the public market multiples are indicating that they expect rates to come down pretty meaningfully. And so then the question in terms of supporting the exits, the sale prices for our companies is going to be about whether those come down faster or slower than what is already baked into those, those market multiples.

Speaker B: The other aspect of it is the consumer demand environment and how does that impact business activity and consumer activity. The transmission mechanism in Europe in some countries may be quicker because of variable rate mortgages and shorter term mortgages. In the US it may be longer but this will take some time to play through into the economy.

Speaker A: Yeah, look, but definitely agree if you take the core um, value levers in private equity, which is EBITDA expansion, leverage and multiple, um, then at the end the best companies and the best deals always have been driven in terms of Value creation by EBITDA expansion. The financing costs good and fine, but they are more relevant for exit markets and um, obviously it's helping that rates come down. Look, I want to talk a little bit about public to privates. That's a strategy the firm Pamira has been pursuing for quite a while and you have completed a number of high profile deals over the years. I'm just thinking about Adevinta, which I believe is still the largest private equity take private of 2024 so far. And more recently Squarespace, which you closed in October. Ah. So what is your approach to take private deals and how do you identify suitable targets? Do you see the evaluation gap between public and private markets or what? What's the philosophy behind.

Speaker B: So look, I think the first golden rule of take privates is you need to have a very different plan to the public consensus plan. Um, if you don't have that, then you're really just levered beta and by the time you put a premium on a company, you shouldn't expect to make more than S and P. Um, Brian and I actually did, uh, I think three take privates we've done together. I take a couple of them from over a decade ago now. Renaissance learning and ancestry.com uh, we had a very different plan as a private company than they would have effectuated as public companies. In the case of Renaissance Learning, we had a core product in there. It was in the formative assessment space, um, that we thought was mispriced by the market. Uh, we also thought that the underlying pricing power of the company was misunderstood by the public markets. We took that company private, we exited it within 36 months and it was a great investment for the firm. Ancestry.com was um, a business that looked extremely volatile, uh, to a public markets investor. From a churn perspective, it's a subscription model and when we were able to get inside the company and diligence from the inside, there was a much better level of predictability that we could see. And so that was sort of an insight driven thing. And that allowed us to take the company private. And actually as a result it's continued to be a much better private company than a public company and has gone through multiple, um, sponsored sponsor deals since we invested. Fast forward to this collection of deals that we've done, some of which you've mentioned in. Um, we've taken just a very different, uh, view to public markets and we think with controlled governance and a different team and aligned incentives and our value creation team, we're able to drive completely different Plans. Um, in the case of Squarespace, we think this business can frankly grow faster both organically and through MA than it did as a public company. In the case of out of Intra and Zendesk, uh, we think these companies will have much higher margins than they otherwise would have as public companies. I mean Zendesk, we only took that private 24 months ago or so. It was a 5% EBITDA margin when we invested. Uh, it will be 25% very soon. Um, so anyway, our mentality is always, what can we do differently, uh, with a business when we take it private? And you know, public markets are, they're great if you're in the private equity world because there's a level of just inherent short termism in the public markets. And if you look at public markets today, 60, 70% of public markets are driven by computers. There's just the world of active long only. Fund management is slowly, slowly becoming a smaller and smaller part of the market. And um, it's therefore much more volatile and creates much more interesting opportunities. I think we'll see more and more take privates from the private equity industry.

Speaker C: So to add the very complicated businesses to understand what's going on kind of underneath, uh, the covers are the perfect setup for us. Like we love those companies in terms of taking them private. Because if you go inside the mind of a cfo, if he or she are trying to explain what's happening in their own business, take ancestry.com, very complicated subscription business, where the only way to really understand what's happening is to look at cohort behavior, meaning the group of subscribers you acquired in this month behave in a certain way over time compared to prior months. That's really hard to report publicly in a way that's digestible. And if you're the cfo, you, once you decide to publish a certain way of looking at the business, you're kind of committing to reporting on that forever. And often those require a little bit more nuance and a little bit more explanation and then you commit to even more explanation. So CFOs tend to commit to a smaller set of metrics that they can report on that usually don't fully explain the dynamics of what are going on in the business. And what we're able to do when we approach public companies is get inside, look at the books. We're able to construct the full complicated matrix of how that business is performing. And very often we find a lot of value and a lot of potential value that is very difficult to communicate to the public shareholders we love those situations. In the Ancestry example, again, they had a beautifully performing business that was actually accelerating growth, but because it was accelerating in growth, they had a higher percentage of early cohorts which tend to churn faster. So you retained fewer subscribers in the first month than the second month, the third month, and so on. And so they reported an aggregated churn across all their cohorts. And guess what? Their churn was going up even though everything you wanted to happen in that business was happening. And it was very hard to explain that to the public shareholders at the time. So those situations we really like and if you look across our portfolio, the take privates we've tended to do, it's a lot in software, especially enterprise SaaS, that is a better metricized business today in the public markets than it has been in the past. Better understood in the public markets, but still not great. Especially if you have a prem to cloud kind of perpetual license revenue transition to subscription or a premise format transition to cloud, um, delivery format. Um, those are really hard for the public market to get their heads and arms around. And then anywhere from consumer to small business subscription businesses have similar dynamics to what we saw in ancestry back in 2012.

Speaker A: Look, you're both saying it, uh, one thing is the toolkit to identify those companies. Then of course it's the active ownership model. But at the end it boils down that you have to see things that others don't see. This is really what makes excess returns at the end. And in these cases you mentioned you saw things that the public markets couldn't realize for some reasons because lack of data, uh, and lack of insight. Look, since uh, we are on the topic of public and private markets, uh, we uh, all know this, there have been a number of uh, publicly listed private equity firms out there. And uh, most recent addition is cvc, uh, a few years ago, eqt, Carlyle, Apollo, Blackstone, of course, all public. Um, look, and uh, when you talk, and when I talk to the leaders of these firms, uh, in retro perspective, they all say that was one of the best decisions we have ever taken. Uh, take share price development of these companies. Um, I still remember, you know, 10, 12 years ago, share price at KKR some $15 the share now it's above 130 or so. Tremendous growth has happened post IPO. So how is Pamir weighing the pros and cons when it comes to going public? And is it something, and you will probably say, never say no, but is it something you might consider down the road?

Speaker B: We're not Going to make an announcement here, uh, on Moonfair podcast. Jokes aside, we are with 30 partners in our firm. We've taken a very conscious decision to stay a private equity specialist. Performance oriented. Um, we've seen and continue to see companies going public, uh, in our space, in our minds and our industry thesis is that over the long term, if you want to be aligned with your end client, whether that's the wealth channel or traditional LPs, um, it's a better model to say private. Uh, so that's sort of where we're headed. And um, I don't see that changing anytime in the, huh, near future.

Speaker C: Yeah. Our most important constituency are the people who give us money to invest on their behalf. And we believe having our compensation and the things we wake up thinking about every day be totally aligned with that group is the most important thing. And when you go public, that completely changes. You have a new constituency, which is your shareholder base. That constituency compares about a completely different set of priorities. They might not care as much about your investment returns as they care about your capital raising and capital deployment because your stock price is going to trade based on your profitability of your fee income stream. That's what that constituency cares a lot about. They want nice, juicy, recurring profitable fee income, which is what those other investors that we care a lot about pay into the system. So, uh, firms I'm sure will manage that conflict. We have made that very conscious choice to stay private in order to maintain that alignment. And we will continue to grow as an organization. We have not been constrained by capital in order to grow organically into new strategies and the like. We've gone into growth, we're launching climate, we're very okay with that. And what a lot of those big public companies are doing then is a lot of M and A. And that's kind of an interesting economic proposition, but it's also risk. And we kind of like we've built this really precious culture here organically over the last 40, almost 40 years. Be 40th anniversary next year. And um, we're very loath to jeopardize that by getting in a position where we feel not just that we could do M and A, but like we have to do M and A in order to keep a stock price going.

Speaker A: Look, when people think about private equity, they would probably say it's still predominantly, um, dominated by the large US players. Uh, you started obviously the firm as a European firm, but uh, pretty soon you managed to build and sustain a quite massive footprint. And in the US and not only uh, at the east coast, but also uh, in the Silicon Valley. So how have you established your presence there and what is your reason for being in this highly competitive market?

Speaker C: Well, yes, so we've been in the U.S. i'm an American, I've been in the U.S. my whole life, or lived in the U.S. my whole life. Premier, uh, came to the U.S. in 2002. So we've actually been in North America longer than a lot of our core large cap competitors in the US have actually been in existence. So um, we've been there a long time. And the decision back then and the decision to continue to grow is really where is the market for potential investments the best? And the US today is by far the largest country, single country that we invest in. Also location of employees between the two offices, we two investing offices we have there between the east and the West Coast. So that was the draw. And it's kind of an obvious draw that people want to get there. So then the question is like, how do you actually get it to work? Right? It's just an amazing thing to me that firms that are not headquartered in Silicon Valley, we have a large, our second largest office is in Menlo Park, California. Um, but firms that were not headquartered there initially, and I include KKR as one of those because George Roberts has always been there. But the Hellman and Friedman tpgs, Silver Lakes, um, it's been very hard for firms headquartered outside of Silicon Valley to build scale enduring presences there. So I think there's maybe you could count on one hand the number of firms that have done that successfully. I count us as one of those in terms of been there the longest with a real scale presence. And I think the thing that has made that work for us is that going back to the origins of our firm, we actually were part of Schroder's, the UK investment bank. We were four individual country funds in Europe. There were separately governed separate currencies. And in one amazing accomplishment in private equity governance, those four firms were able to come together in a four way merger to create the uh, firm that eventually became Premiera. And this idea of having some geographic entrepreneurialism, of really finding a way to have people go and lead an initiative into new markets, kind of goes back to the core of where we started and recognition that things are just done differently in different areas. And I think there's more difference between the west coast USA private equity approach and the east coast USA private equity approach than it probably is between any two countries that you might find private equity in. Um, west coast, nobody wears ties. It's very tech centric, it's very kind of growth oriented. East coast, much more financially driven, lots of silk ties running around still in this day and age. And uh, we've gotten it to work because we believe in this entrepreneurial model of letting people go and build businesses there, um, and aligned with our sectors. So I mean if you're a tech investor, I don't understand how you cannot want to have a presence of some form in Silicon Valley. It doesn't mean you only invest in California companies. But there's just so much that's happening there daily, weekly, constantly in terms of the flow of innovation. Um, I just think you're missing something by not being there. But it's been very hard for other firms to make that work.

Speaker A: Look, we talked about active ownership and I want to double down a little bit on value creation. If I take a look at your portfolio, uh, one thing uh, that uh, comes um, up is that it's an extremely diverse portfolio. It ranges from tech companies like Klarna down to uh, my favorite company, Golden Goose. Uh, so how do you manage to apply your value creation strategies across the uh, such a broad spectrum of very, very different business?

Speaker B: Good question. Look, our investment philosophy is predicated on hyper specialization. So we try and provide deep insights to very narrow areas. We talk about a technology team. Our technology team is 60 people today we've invested 18 billion euros. Uh, we've backed more than 70 companies. Ah, we use the word technology. But within technology we have a dozen different micro segments that we cover from cyber and AI through to HR and uh, erp, sas. Um, so we are very, very specialized in our investment philosophy and we've taken exactly the same thinking and philosophy into our value creation team. So our value creation team is sector, uh, aligned so sits within our sectors. That's the first thing. The second thing is that we've uh, hired uh, typically not exclusively but typically specialists, so ex operators who are domain experts in certain fields. And um, the industry we think has gone quite consultant heavy. Um, It can be valuable in some areas. But fundamentally when you've got scale, quality companies and good managers on the other side, um, they often want to be speaking to people that can really add value to them who have done their jobs before, who know the problems and how to make decisions and execute from a position of being a principal, not an advisor. So we have a specialist model. Um, so in practice what does it mean? It means we've got people who are experts in pricing and packaging in digital marketing, in search engine optimization, in go to market, in procurement and, and, and and that's how we've sort of built out our value creation function. The um, interesting bit actually is the cross fertilization across those sectors. So take go to market, um, you know running an efficient salesforce in software that sort of got to a PhD level. Whereas in our uh, services effort you'll find people at a completely different level um, in terms of the sophistication they're running their go to market operations. So taking someone from there he um, spends most of their time helping our um, software companies optimize their salesforce efforts and plugging them into our professional services uh, portfolio is really valuable um, digital marketing. So in consumer, in the team that I've um, been sitting in and leading over the last few years, take a guy uh, in my team who runs all of our search engine optimization for example, we pulled him out of booking.com uh he was the guy running that globally for booking.com, who's one of the best companies in the world at that discipline. You know he's been great within our consumer portfolio and our online portfolio. But then pulling him out and putting him in our services team or our uh, software uh portfolio has been even more valuable because their access to that kind of talent has been you know is just, is a lot lower. So you know our value creation effort is, is works and it works for that reason. It's been very effective.

Speaker A: Diban, let's talk a little bit about the consumer sector. A sector you have been spending time uh, quite, you know, um, a bit over the years. Uh it's a sector that can be both challenging and quite complex giving uh, the cyclicality of the businesses and so on. So what are you looking for in consumer businesses?

Speaker B: So look, um, we invest in four sectors. Consumer health care, um, services and tech. Three of them are really B2B and have some commonalities, not entire commonalities but they have some commonalities. Consumer obviously is B2C. It's typically consumer pay are the models that we'll be investing behind. And by definition it's a cyclical industry. It's just a question of how cyclical. Um, so the very first thing for us is be on the right side of consumer wallet share shifts. So everything we do has to check that box. Um, we've invested in pet retailers, uh, we've invested in online marketplaces, we've invested in off price fashion, um, we've invested behind casualization. These are all structural share shifts and that needs to be the starting point for anything we do in a consumer investment. The second thing is obvious thing but it has to be brands people love. They need to be top of mind, um, and they need to elicit some sort of emotional thing. Um, we see it in our portfolio companies we run a mile from our consumer companies that we look at that rely on heavy marketing. Um, m most of our businesses, you take our brands portfolio, um and even our online portfolio, uh, they're running a single digit marketing as a percentage of revenues. In other words the brands and the products sell themselves. Um, we don't need to shout from the rooftops to get consumers in the door. So that's the second kind of key thing. And then we need, because of the model, um, and what we're getting paid to do, we need some sort of alpha that we can add to a business. So we look for gems with mess around them. Right? So Doc Martens for instance was a family run business that was over indexed to wholesale and that was what we inherited. And when we exited that business, um, we exited a business that was professionalized and far uh more skewed towards direct to consumer and that was through retail and online. So we need some sort of alpha. I mean you talk about golden geese. Golden goose um, was barely present in the US when we invested. It's now a very big part of the business. Um, it was almost 100% footwear. Uh now a meaningful percentage of that business comes from non footwear products. So we need to have a really good starting point like a right side of share shifts brand. Someone loves great products but there needs to be something around it that we can do fundamentally differently. So that's what we look for really in consumer uh, investing.

Speaker A: Look, I want to talk about AI. We are all fortunate that after the Internet and the mobile revolution we can witness another uh, technology disruption. Uh, Bill Gates um, says this is the lifetime chance of an entire uh generation. And when we talk about numbers, there's a study from Goldman Sachs which came out earlier this year. They predict that AI will stand for some 2.5 to 4% of GDP in terms of investing in the US alone. If you take the upper element here, the 4%, that would mean we are talking about 1 trillion uh, in investments. Um, McKinsey predicts that just generative AI alone will have or ah will lead to productivity gains of some 4 trillion globally. 4 trillion. The same size as the entire GDP of Germany. So it's a massive uh, revolution. And Brian, in one of your recent interviews you have said you see Lots of potential in non tech industries where AI can increase productivity. So can you talk a little bit about these areas and what potential for disruption in particular specifically you have in mind?

Speaker C: Well, I agree with Bill Gates. This is going to be, I've been through a number of big technology shifts in my career. There's Internet, cloud, mobile, um, all of which were very big seismic level impacts but they took place over a pretty protracted period of time. The big thing with AI is it's going to be a uh, huge. It's uh, going to be an impact of those scales or bigger. We think it's going to happen actually in a much shorter period of time. So if you do the, the annual rate of change you're going to see from AI, uh, especially in the next 36, 48 months I think is just going to be massive. What I was saying about the other industries are. So we're a big software investor. Our software companies are just buzzing about this. Um, so first of all they've been investing in AI forever. I mean it just hasn't been as exciting. The generative AI shift has really put the spotlight on what can be done. That's actually elevated a lot of the efforts that were already ongoing while providing a whole new area for these companies to invest in. But every single software company is investing behind this. It's going to make software more profitable, it's going to make software more interesting, higher growth, higher value to its customers. But it's not likely to generate as much alpha in that sector because all the companies are doing the same thing. So it's very likely, we think that you'll see the same structure of competitive market share um, in five years time as you do today. Sure there will be some new people who kind of redefine workflows and do some really new things. But in general we think in software it's back. Smart incumbents is actually not a bad way to go. In other areas though, take our services investing strategy. There are a lot of companies then you still kind of go and talk to them. They're either incapable of really investing with a digital mentality around how to disrupt their own very human carbon based workflows, um, or they're just AI deniers. And there's still a lot of folks out there that are saying, well you can't possibly replace what a human does in this particular workflow. It's too complicated. There's too much bespoke knowledge in this that you could import with AI. And we love that setup because if you're able to find and back somebody with the mindset of really being an AI embracer. In some of these, uh, service industries, you can have a very differential impact relative to a competitor set that's either incapable or unwilling to really take advantage of those full tool sets. You're not likely to see that happen in B2B technology companies. There it's like, who's doing a smarter thing With AI in services, you might find you're actually able to completely change workflows, um, and your competitors are asleep with the switch.

Speaker A: Look, one of the fundamental differences, um, with respect to the Internet area is the Internet was basically driven by a couple of in these days startups, uh, from the Silicon Valley and other places. AI is driven by an ecosystem of some of the largest companies in the world. And this is why I fully agree it's happening much faster and much faster than many, many people believe. So what now? Many people say, okay, if I want to play AI, why don't I adjust, invest into the Magnificent Seven. Uh, I have a cost section of some of the largest companies. If you read the stock prices, you know, they have been, um, doing quite well, um, in the meantime. By the way, as you know, those seven stand already for over 30% of the total valuation, uh, market cap of the S&P 500 and they stand at some 15% of the uh, total of all publicly listed companies. Um, so it's a way to play it. What would you say? Why should then people uh, trust their money? Private markets, um, where do you see the opportunities for private equity players, uh, such as yourself?

Speaker C: Look, I think investing behind the hyperscalers, Microsoft, Amazon, Oracle, Google is really not a bad way to play the AI trend because those companies are going to invest massive amounts of in this, but they're going to be platform providers to the industry. It'd be very similar to public cloud. If what you wanted to do was play the public cloud shift, you could have very easily just invested in Amazon and Microsoft and you would have had a very nice updraft from that. What you would have missed was the entire massive ecosystem of companies that then built themselves on top of that very open infrastructure. And AI is going to progress along that path. That's before you, by the way, say it's pretty obvious that if you wanted to invest behind OpenAI, you missed out as a public shareholder at a minimum from 0 to 150 billion. So at some point maybe OpenAI becomes a public company, but it's going to be at a very different market capitalization than what you were able to play, for example when Microsoft went public or when Google went public in terms of their relative market capitalization. So uh, more and more of the value at these companies is happening in the private market and that's going to continue. So if you want to tap into that, it's both kind of the growth on some of these real platform companies like an OpenAI, uh, or it is that entire ecosystem of companies building themselves on top of that infrastructure. Um, the overwhelming majority, I mean 95% plus of those companies are private and will likely remain private for the near term.

Speaker A: Brian, I couldn't agree more. Look, one of your recent acquisitions that really uh, caught my eye in the technology Space, uh, is BioCatch, a, uh, company based in Israel and a company that uses behavioral, biometric and machine learning to prevent fraud and money laundering. Uh, can you tell us a little bit more about this uh, acquisition and how does it fit in your broader Strategy?

Speaker C: Yeah, uh, BioCatch was a company that was identified by our growth team quite some time ago and we were able to secure a small investment in them which ultimately led to a buyout of the whole company through our uh, growth strategy growth fund. What uh, they do is they have, as you said, it's biometric technology, uh, to prevent uh, fraud or at least address fraud in major banks. If you look at the biggest, highest growth fraud vectors, increasingly they are, uh, it's not about penetrating the firewall anymore. It's not about stealing people's passwords and kind of breaking through the technological systems. Those systems are advancing at exponential rates in terms of their sophistication, their processing power and the like. And so it's just not that interesting to try to like break through the firewall. What's not progressing in that sophistication is humans. I mean a human being today is basically the same as a human being was 100,000 years ago. But they are not getting smarter. And um, tactics by which you can co opt somebody, convince them that their son is in jail and you need to wire money, um, is happening more and more. And BioCatch provides solutions that can determine whether somebody is the person, uh, kind of using their account login credentials, whether the person who's actually interacting uh, with their account is being influenced by somebody else at the time. Maybe they're listening to and kind of reading instructions over the phone as often happens when they get wiring information and is able to stop fraud kind of on that level. So it's addressing one of the biggest areas of growth in terms of fraud for major banks, um, so this company has reached to 100 million of ARR with really fantastic growth. And we're able to back them into the next generation of adopting what has been a very AI driven strategy for detecting and assessing this kind of fraud. It's really exciting stuff. Uh, by the way, if you have parents, grandparents, these are the kind of things you should be worried about today. It's not about losing their password. It's about somebody getting them on the phone and, uh, getting them to wire money where they shouldn't send it.

Speaker A: Absolutely. Look, Deepa and Brian has been terrific. Unfortunately, we are approaching the end of our deal, uh, talk already. Time is really flying. But before we go there, I want to ask you a question that I'm always asking in these deal talks. And it's a question where I believe people can really have or, uh, get another opportunity to learn from your incredible careers and experience. So if you go back in time, and I want to go one by one and start with you, Deepan, what advice would you give your younger self?

Speaker B: Advice I'll give my younger self. I want to hear the best answer that you've heard from, uh, all the people that you've been interviewing. Look, I think, um, there's really no magic advice. That's probably the first thing I'd say. I wish there was. I think, um, if I could go back in a time machine to myself, I'd probably say work on your character. We all look at aggregate returns. The reality is most of these aggregate returns, they're made in the tails. Your great successes and your biggest losses within a portfolio. They tend to be mistakes you make at the top of the cycle from too much hubris. And they tend to be at the bottom of the cycle when you've been too paralyzed or fearful to make the kinds of investments that you should be making. A lot of that, I think, comes down to your ego and your character and having like a understanding and awareness. It's not something we talk about. I don't think it's even something we talk about that much even in our own organization. But I don't really worry about these Harvard graduates and MBAs that come here with supercomputers in their head that they're gonna build the capability from a competence perspective. But I think the thing that kills you ultimately as an investor one way or the other is more the psychological stuff. So, um, I'm not sure if I could go back in a time machine, how helpful or actionable that would be, but just the awareness of that would be pretty helpful for me.

Speaker A: Very, very interesting point. Never heard this one. Brian, what's about you?

Speaker C: I have a very similar thing. Uh, I would really say this to my younger self, which is the ideas that you think are great ones are probably not as great as you think. And the ideas you think are pretty good, but not. Are probably much better than you think. And if I could have pushed myself to be more invested and higher, more confidence on some of the things that I thought were good ideas, but I didn't quite know how to really kind of make those things get, uh, real, I think I could have just done more for myself then. And then later, of course, once you have some success and you decided that you're really good at something, those are the times you should. I wish I could go tell myself maybe you're not as smart as you think you are. Um, dial it back a little bit.

Speaker A: Super helpful advice. So thanks a ton. Uh, Deepan, Brian, thanks for your time. Thanks for this insightful discussion. I really enjoyed it as, uh, as much as possible. It was really great. And to everyone who joined us today, thank you for listening in. Uh, thanks for, uh, uh, joining our deal talk. I hope to see you again at our next deal Talk. And if you have missed the session, you can obviously download and, um, listen into our past deal talks on moonfair.com stay healthy. Again, thanks a ton.