The transcript from this week’s, MiB: David Roux, BayPine, Silver Lake Partners, is below.
You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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This is Masters in business with Barry Ritholtz on Bloomberg Radio.
This week on the podcast, another extra special guest, David Ru, is Chairman of Bay Pine, a fascinating private equity firm. They are not interested in simply flipping companies or buying firms, and then quickly selling them what they do. Much more involved than a consulting firm. They are experts at digital transformation across a wide variety of sectors in the investing world. And they essentially take companies as varied as tire manufacturers and industrial producers and retailers, and find intelligent ways to use technology to make these companies more efficient, more productive, more profitable. And they’re not, again, they’re not just consultants. They come in, they take a stake in a company. Sometimes it’s a minority stake, sometimes it’s a larger stake, and they help affect this massive change with great results. They, they’re one of the few companies that specialize in this. Their track record has been very impressive, and the approach they bring to transforming old industry companies is, is absolutely fascinating. Previous to Bay Pine, David was one of the co-founders of Silver Lake Investors, a legendary firm from the nineties and two thousands. With no further ado, my conversation with Bay Pines. David Roux,
David Roux: Thank you. Pleasure to be here.
Barry Ritholtz: It’s a pleasure to have you. I’ve been looking forward to this conversation for quite a while. Let, let’s start out with your background. Bachelor’s from Harvard Masters in philosophy from Cambridge, and then an MBA from Harvard Business School. What was the career plan?
David Roux: You know, I originally wanted to be an architect.
Barry Ritholtz: Really, I’ve always wanted to pretend to be an architect. That’s, that’s an area I’m fascinating. And why did you not go into that space?
David Roux: You know, I grew up, you know, building go-karts and tree houses and the like, but I, I think when I got to school, I found that I could make models, build software, maybe create organizations, and that it was as much fun as building a building.
Barry Ritholtz: There’s, there’s a different sense of, of creating a company versus creating a, a certain type of space inhabited by people. No, no doubt about that. So, so let’s talk about some of those companies that you built. You begin at a few tech startups, you found Dex, which eventually gets acquired by Lotus. What was the startup process like? This was mid 1980s, is that about right?
David Roux: Yeah, early eighties, you know, in business school, I realized this is the kind of early PC boom, and I realized from my academic work, you know, there were word processors, there were spreadsheets, but there was not very good database technology for PCs because they didn’t have what the mini computers had and the mainframes had. So I saw an opportunity to create some software and also to be able to marry that up with data for people to use on their PCs. And that was the idea behind Tex.
Barry Ritholtz: So Tex gets acquired by Lotus, who eventually acquires Lotus.
David Roux: Lotus is eventually acquired by IBM, by coincidence. That was a relationship I managed, so I had a very good kind of ringside seat and all that. They were very interested in the company’s suite of primarily communications technologies, CC mail, Lotus Notes, because the sort of networking boom had already started up, and they saw a world where all of these PCs would be interconnected.
Barry Ritholtz: How did you end up at Oracle?
David Roux: I had met Larry Ellison during my Lotus Days. I had done another company, which we sold to Symantec. Larry had contacted me and said, look, we’ve got a tiger by the tail. The business is growing like crazy. I think there might be some m and a opportunities. We really don’t have a corporate development function. Would you be interested to come here and, and build one? That’s how it happened.
Barry Ritholtz: Oracle, especially in the eighties and nineties, became famous as a serial acquirer of all sorts of pieces, spin outs, roll ups. How long did you stay at Oracle?
David Roux: I was there all through the nineties till 1999. You know, it was really a terrific experience, extremely rapid growth. I ran the venture fund, did all the investing off the balance sheet. I also managed our started and managed the m and a program. So yeah, it was fantastic.
Barry Ritholtz: can imagine Oracle in the nineties is you were out in California, I’m gonna assume, Silicon Valley, right?
David Roux: Right. In the heart of things. Ground zero,
Barry Ritholtz: I gotta think Oracle and Ellison, like I cut my teeth on them in the nineties. He seemed to have been everywhere. Oracle was consistently ranked best company to work. Top 10 fasting, growing companies like Oracle. I think people who just came, came into the market in the past 10, 20 years, don’t know what a powerhouse Oracle was, and still is.
David Roux: Yeah, it has a remarkable history. You know, a class of 86, meaning that’s the same year as Apple, Microsoft, sun, apple. And so they’ve been at it and doing a great job for a while. You know, Larry’s often thought of as a very aggressive and astute business mind, but I don’t think he gets enough credit for his technical chops. If you look back, think about it, he has been fearless about betting the company on major new architecture. So, you know, he made the original bet around relational databases when everyone else Yep. Was doing something else. He then made a major bet on Unix when it was a kind of obscure, you know, scientific operating system. He then made a huge bet around enterprise applications, big bet around client server. And then maybe the most courageous bet was in the mid nineties when Netscape had gotten the first browsers out.
The internet, boom, had started a great story. He came in one morning after a weekend, we all sat down at our, we had a little executive committee calling. He says, look, I’ve been thinking, I think this internet thing is more important than most people understand. I would like to change a hundred percent of what we’re doing in development. I wanna stop all of the client server work, and I wanna re-platform everything that we’re doing on a web architecture. 3000 engineers, dozens, hundreds of products affecting, you know, thousands upon thousands of customers. And he very casually said, and I’d like to do this by the end of the day.
Barry Ritholtz: Sounds like that’s a multi-year project. He, was he talking about a plan or was he talking about
David Roux: No, no, no. He was talking about, I want, I want or of engineering and said, I want this done by the end of the day!
We’re just gonna stop. We’re not gonna run another line of client server code. Wow, it’s done. This is gonna be the new architecture, this is the future of computing. This is what our customers are gonna want in two and three and five years time. So we need to start building it now for it to be ready. Then it was really the thing. I mean, it was, I mean, just a incredibly gutsy bet, but a very good sense of his technical prowess and the confidence he had about the kind of what’s coming next, next part, huh.
Barry Ritholtz: Sounds like Oracle was quite an experience at the end of the 1990s. You co-found Silver Lake in 1999. What led to that? You were, you were at Oracle, you were like a 15 year veteran at Oracle. Is that about right?
David Roux: No, not quite, but I’d been there a while and it was, you know, a fantastic experience. I had a great job, really good relationship with Larry, rest of the team. You know, I was in my late thirties I’d, I’d kind of come to realize that it was always gonna be Larry’s business, rightly so, and that I was looking around and I, I saw what I thought of as I’ve come to call it an os, which is acronym OIPS, for an opportunity in plain sight. And I couldn’t understand the following. I couldn’t understand why investors were pouring money into venture firms, pouring money into growth equity, and not doing anything to invest in technology using a private equity format. Didn’t make sense to me that it would be a good small company, it would be a good medium sized company. Then all of a sudden it would not be an appropriate place for fiduciary capital. That didn’t make sense. And I, I thought, gosh, that must be a huge opportunity. You know, we were right in the middle of the internet, boom. So tech was, you know, front and center of the news, and yet there was none of the, you know, traditional firms were there. In fact, they were actively avoiding it. You know, it was sort of not considered an appropriate place to invest that kind of capital.
Barry Ritholtz: Why was that? Was it that people were just so distracted by the new hotness, by the dot coms and the internet or Not, Or were the public markets there for larger companies if they needed capital?
David Roux: No, no, I don’t think that, here’s what I think. ’cause this is what they told us. I mean, I asked that exact question. The theory was this, you couldn’t go write checks for hundreds of millions of dollars if you couldn’t underwrite the technical innovation at the heart of these business models. If you didn’t understand how the semiconductor worked, if you didn’t understand how the software was built. One, two, there was a theory that these businesses had volatile cash flows and therefore couldn’t be leveraged, which was the, you know, the whole point of leveraged buyouts. And finally that they were companies run by children, young, young, young folks. I was in the business, and when I heard all that, I said, you know, those guys in New York and the skyscrapers and the guy in London and those people in Munich and Tokyo, I don’t think they really know what’s going on here. These are actually really good businesses. The cash flows are unbelievable. Customer franchises are very, very durable. There’s incredible organic growth here. This is a really big and attractive opportunity. I think someone’s gonna, you know, make a great return by building a business here. And
Barry Ritholtz: You don’t need to underwrite the entire underlying technology. You’re really just talking about that transition to whatever makes those companies that much more attractive. Is that a fair assessment?
David Roux: When you’re doing what Silverlake does and what it was built to do, you are making a fundamental bet. Technology. It’s like when people buy technology or enter into an agreement with a company like an Oracle or a Microsoft, you’re not buying what they’re selling you today. You’re buying the promise that they will continue delivering. It’s like buying a lot on a river. Now. You’re, you’re not buying the water in front of your house. You’re buying the promise that the water will continue to flow, right? And so you do need to have a point of view about how well positioned these companies are for the future.
Barry Ritholtz: You co-found Silver Lake with this is, this is some lineup. Glenn Hutchins, Jim Davidson, Roger McNamee. Tell us about your Silver Lake co-founders.
David Roux: Well, look, they’re each enormously talented and capable in their own right. You know, we all live near each other, knew each other professionally, beforehand. We talked extensively about this opportunity and agreed that it was the next big thing. And I think that, you know, looking back on it, I’ve been very fortunate at Silver Lake and prior companies when I started something to do it with a group of people. And that it’s always been great to have folks from different backgrounds, different styles, different professional experience. You know, it’s very complimentary and, you know, it’s not for everybody, but for me it’s, it’s the way I like to do business. How
00:13:30 [Speaker Changed] They weren’t at, at Oracle prior, how, how did, how did the four
00:13:34 [Speaker Changed] Together? How do we all know each other? Yeah, Glenn and I had been college classmates, tennis partners, fly fishing buddies. He was previously at Blackstone. Jim Davidson and I are both big sports fans and shared season tickets for the Sharks and the Warriors. So we would spend a lot of time together. He was running the h and q investment bank, and then Roger was my next door neighbor and very good friends with Jim. So, you know, it was a group of people who already kind of knew each other, had some personal relationships to build on, and, you know, came with a different set of experiences.
00:14:15 [Speaker Changed] What was Silver Lake like in 2000 as the dot coms all imploded?
00:14:20 [Speaker Changed] Well, you know, it was an interesting thing. I would jokingly tell people that we bought high, sold low and made a ton of money. And it, you know, it was a very challenging economic environment. The Nasdaq during that period fell 80% right over from, from the front end, front end of the fund to the back. The fund itself, in, in a very fundamental way, was set up as a counterpoint to the mania around the internet. And what we would tell people pointedly, so we say, look, you’re completely right to be excited about the technology sector. It’s under invested, it’s underappreciated for its scale. It’s underappreciated for its growth. It’s underappreciated for the strategic value that it plays in the economy, but you’re investing in the wrong companies at the wrong price. And I had a little chart that I would show them, say, here’s a thousand, approximately a thousand public company public tech companies at that time. These 10% are what’s driving the entire valuation. They’re trading at 10 to 30 plus times revenue,
00:15:31 [Speaker Changed] Not
00:15:32 [Speaker Changed] Earnings revenue, not earnings revenue. And I said, I can just tell you that is the wrong price. Not necessarily bad companies, but that’s, those are the wrong prices. I said, but look at these other 90%. If you take the rest of the publicly traded technology companies, they’re traded one times revenue, which is the same as the s and p at the day of the day, pre
00:15:54 [Speaker Changed] Pretty reasonable, more or
00:15:55 [Speaker Changed] Less, very reasonable. And they grow twice as fast. So you have an opportunity to buy growth at half price. You’ve got the situation. There’s sort of the, the fundamental insight at the heart of the Silverlake value proposition is, is that technology, the entire tech sector was on sale even at a time when people thought it was super expensive because 10% of the market was super expensive, but most of it was not.
00:16:27 [Speaker Changed] How much of what’s been going on in the 2020s has been a focus on that same top 10% of tech companies as being overly concentrated and wildly expensive. Do you think the same situation is starting to show up in the modern era?
00:16:46 [Speaker Changed] Well, there, there are some parallels and also some important differences. The parallels are that there is a concentration of interest. The differences is those companies are now huge businesses with gigantic levels of profitable, unprecedented levels of profitability and growth rates that have never been achieved before by companies at that scale. So that’s the part that’s really different, right? A lot of the things in internet time was highly speculative. The other thing that’s different is, is that today the companies with the most spectacular valuation levels are private. People aren’t wrong to say they are a winner. The, the sort of the bet of course is are they the only winner? Right? Right. And so you have to believe that there won’t be successful competition. You know, I would only point out that 40% of their sales go to four big vendors, right?
00:18:00 [Speaker Changed] Each
00:18:00 [Speaker Changed] Of whom has their own chip development program. And so I’m not saying they’re gonna build a better chip, but they’re definitely gonna build a cheaper chip. Right? And so there’ll be some dampening for sure from that.
00:18:13 [Speaker Changed] And, and, you know, I’m around long enough to remember when it looked like Intel was impregnable, that they had a, a, a, a a, A position in the ecosystem that nobody could touch. And now it feels like they’re an also ran,
00:18:30 [Speaker Changed] Well, this goes back to the point that you raised earlier, which is if you’re gonna do tech investing, you need to have an opinion about the tech. It’s not just that you can look at a series of financials and say, oh, they had a good quarter last quarter. They had good year over year numbers. I like the three year trend. And say, fine, you have to separately underwrite the quality of the underlying architecture, what’s going on in the industry, and believe that they’re gonna be able to keep going. And so, like, if you like go to Nvidia, let’s talk about that, you can look at the financials and say, this is fantastic. You know, they’re doubling and troubling and these are incredible numbers and growth and blah, blah, blah. The way they’ve gotten their improvements has been to go beyond what has been possible in any other chip manufacturer. The other chip manufacturers have gotten their productivity improvements around the physical geometry by making the chip smaller and smaller,
00:19:34 [Speaker Changed] More trans law,
00:19:35 [Speaker Changed] More and more Trans Moore’s Law, classic, classic Moore’s Law,
00:19:38 [Speaker Changed] Down to ever smaller,
00:19:41 [Speaker Changed] Ever smaller, right?
00:19:42 [Speaker Changed] Right.
00:19:43 [Speaker Changed] These guys have got, have stolen a march on the rest of the industry with their GPU chips by doing other things. They’ve gotten probably two or two and a half times, which is a lot of improvement. But they’re talking about improvements of things that are kind of 8, 10, 12, 16 times productivity improvement. So they’re doing it other ways. They’re doing it with algorithms, they’re doing it with, you know, other approaches. And so you have to form an opinion as an investor about what is the likelihood they can keep doing that. ’cause it’s been the key driver
00:20:20 [Speaker Changed] And keep doing that for the next three to five years, not just the next quarter.
00:20:25 [Speaker Changed] Bingo.
00:20:26 [Speaker Changed] So let’s talk a little bit about Silver Lake and how that eventually leads to Bay Pine. It feels like, and I don’t know if my my memory is correct. Silver Lake was one of the first buyout shops built around making technology investments or investments in technology companies. Is, is that a fair description? Several
00:20:47 [Speaker Changed] Other deals had been done, but they were occasional and they weren’t the central focus for, for anyone.
00:20:54 [Speaker Changed] Tell us some of your memorable investments at Silver Lake.
00:20:57 [Speaker Changed] Well, I think some of the investments that the firm is best known for out of the box first was Seagate, which is a hard disk drive, absolutely manufacturer. It was at the time, the number one producer of DISC drives. They had the best technology, great management team, very complex, but finally crafted extended supply chain through Asia and Wall Street hated ’em. It was hardware in the age of the internet. So the other thing that traded really, really hot back then was any new telecom business, right? Optical, this telecom that. One of the insights that we had as a group, and it, it stemmed from the fact that we were not finance people, but industry people with operating backgrounds, is we understood that the entire tech industry is an ecosystem, right? It operates like your body, right? All the parts sort of need to fit together.
00:21:56 And they operate inter dependently. And so everybody at that time was talking about the information superhighway, and they were buying the highway, right? They’re buying the telecom companies and they were buying all these new applications that you could do on the internet, but people forgot that you couldn’t have an information superhighway without parking lots, right? In other words, the electron, the bit had to start somewhere and it needed to end somewhere. So if you believed that broadband was going to explode, then you must also believe that storage is going to explode. And so we were able to look at that kind of systemic arbitrage around the architecture and say, you know, the comms piece is overpriced. I don’t think we should pay 10 and 15 times for a pipe when we can pay six times ebitda EBITDA earnings for the number one storage company in the world. Now, there was a bunch of complications around things they owned and you know, it was a public company, so it was a leveraged buyout and all the rest of that. But that was really the fundamental insight.
00:23:09 [Speaker Changed] So it sounds like a lot of the public market investors had a fundamental misunderstanding about the entire tech sector, the ecosystem as you described it. What other things did people just not get, not understand, overlook obvious investments in plain sight? Yeah.
00:23:29 [Speaker Changed] Well I think in that, in that case, it was a hangover from the very real war of attrition that for the prior 20 years had proceeded that moment in time where the industry went from 120 disc drive companies to six or seven.
00:23:51 [Speaker Changed] We had an idea who were the winners were gonna be.
00:23:53 [Speaker Changed] Well. And so the question was, is there going to be more blood in the water or have we arrived at an industry structure where everybody is gonna do okay? And the number one player’s probably gonna do better than most? That was one. The second issue is, could anyone figure out a way to, at the time, Seagate owned some shares and other software companies and it wasn’t clear to the market how they could sell those in a tax efficient way. And that’s one of the things that with structuring, we were able to figure out, I’ll give you another one where we bought a Vago, Hewlett Packard’s semiconductor division in this timeframe, the early two thousands, it was very much the fashion to be out of semis. Semis were out of fashion, right? Right. The world was infatuated with the other end of the stack, not the, you know, I didn’t want to hear it.
00:24:55 People didn’t want to hear about semis, they didn’t want to hear about sub assemblies, they didn’t wanna hear about components, they didn’t wanna hear about computers. They wanted to hear about all the sexy high margin, no cost of goods, no capital equipment, software services, internet application. Sounded wonderful. You know, this is the age of pets.com, right? That thing. And so it wasn’t wrong to say that software was good, but it didn’t automatically follow that hardware is bad. And so people had this idea almost like a dialectic, which is that you couldn’t believe in something that you like, that the other must be bad. And so semis were completely out of fashion. Semens spun theirs off, HP spun theirs off. IBM either closed or spun theirs off. You know, just all these people who had, who had very significant capabilities and fabs that today would be worth fortunes.
00:25:53 Leave aside the intellectual property and the skill sets and the trained labor force, you know, you know, off all went off the back of the truck. So we bought this from hp, hired a great manager, CEO, named Htan, and built this up into a kind of highly specialized in others. We didn’t buy it with the idea that we’re gonna go compete with Intel and try to dislodge them from the PC market, but rather with the idea that everything was gonna have a processor, cars, kids’ toys, you know, your kitchen appliances, and that somebody was gonna have to make all those processors. And so there was an exploding rest of market opportunity that Intel wasn’t focused on, right. That people like Avago could
00:26:47 [Speaker Changed] Be. Today, I think automobiles are the second biggest consumer of semiconductors. I dunno if that’s still true. That was true a few years ago.
00:26:54 [Speaker Changed] I, I think that’s right. In fact, the, the num, the stat I haven’t quote for people is, is that the semiconductor content in a car is more valuable than all of the metal, than the, all the steel and all the aluminum. And maybe more importantly, it is increasingly the case that what the semiconductors enable the navigation, the
00:27:20 [Speaker Changed] A BS, the S lane departure warnings,
00:27:23 [Speaker Changed] All the features that really give a car kind of its identity, right, are increasingly denominated by the, you know, digital capabilities.
00:27:33 [Speaker Changed] What, what about the rest of the world outside of PCs and automobiles? It was incredibly far looking to say in the early two thousands, by the way, they’re gonna be chips in everything. Not just dishwashers and refrigerators, but toys and, and electric bikes and you name it, it’s gonna need a chip. That was a decade ahead of its time.
00:27:57 [Speaker Changed] You would’ve been very amused when we raised our first fund. You may remember the Furby
00:28:04 [Speaker Changed] Doll. Sure, of course.
00:28:05 [Speaker Changed] Which was a
00:28:07 [Speaker Changed] Christmas, a hot, hot product. You couldn’t get it.
00:28:09 [Speaker Changed] A very hot kids product, little furry thing. The
00:28:11 [Speaker Changed] Eyes bag it had,
00:28:13 [Speaker Changed] And it had in it a digital signal processing chip. They would allowed it to make little noise, cuddly noises and, you know, wiggle its legs. And I used to bring it with me to all of our fundraising meetings. I wouldn’t say a word about it. I’d simply take it out of my briefcase and I would put it on the desk between myself and the prospective investor. And I wouldn’t say a word about it. You know, I’d launch into my talk about semiconductors and hardware and the evolution of the sector and so forth. And finally, sometimes it would be five minutes, sometimes 10, but it was never more than 30 minutes. Right? The investor would say, David, what, what is that doll? Why are you, why do you have that doll There I go, oh, I’m so sorry. I forgot to mention it. That’s a Furby doll. And I brought that for you because I wanted to illustrate in a simple way how the march of technology is going to go. I said that Furby Doll has more processing power than the lunar lander.
00:29:12 [Speaker Changed] I knew you were gonna go that way.
00:29:14 [Speaker Changed] And I said, we’re looking in a world where all of music is gonna be digital. All of film is gonna be digital. Television’s gonna be digital. The way you do your phone is gonna be digital. I said, so all of these analog things, as they become more digital, need this technology. And if you understand how the technology works, you’ll not, because you’re kind of a big brain genius, but because you’ve played the game before and you understand what all the pieces do, you’ll be in a really good position to identify those opportunities going forward. I’ll give you another good example. The part that, and the little wrinkle that I think gave us a lot of credibility, and by the way, gives us credibility now, is to say, let’s own the right technology, put it in the right companies. And the key part is at the right price.
00:30:07 It is bringing an investment sensibility and financial discipline to the work that we do. Right? We’re not like technology zealots, and I wanna just own it to own it, right? It’s not a prize, it’s not a trophy. It’s a, you know, would this be useful and would somebody else be interested? I’ll give you another example. eBay came out of the blocks super hot. They bought PayPal and then they bought this thing called Skype. And Skype was the first software based peer-to-peer video conferencing capability so long before Zoom 20, 30 million people on at the same time. Which was an amazing technical feat. Wasn’t exactly here what it had to do with auctions even less clear what it had to do with PayPal. But eBay bought Skype and it kind of noodled along in the Skype portfolio in the early two thousands for a year, two years.
00:31:07 No one paid any attention to it at all. We said, my gosh, look, they’ve had three CEOs in two years. They’re spread out all over the place. They haven’t upgraded the product in two years. Maybe they’d be willing to sell it. Contacted them once, contacted ’em twice. Eventually they said, yeah, we’d be willing to talk to you about that. ’cause we had a point of view about, this is a really exciting market, but no one’s paying any attention. So if we could carve that out. And we went to, we went to E eBay and said, keep it as much of this as you want. We’ll buy the rest of it at a, a full valuation, which we did. And it was a business that had nice growth despite really being a feral child, right? Right. And we said, look, get paid twice, we’ll pay you once what it’s worth. And we’re gonna make this way more valuable than you possibly could because we can focus on it and make a bunch of changes. And it was a, it was sort of a troubled, it was complicated asset where, you know, there was so much staying litigation, they hadn’t upgraded it for a long time. Apple had just announced that they were gonna be offering a, you know, video, video service, FaceTime. It became FaceTime. So there was, you know, Microsoft said they wanted to be in the business. So there was a
00:32:22 [Speaker Changed] Lot of competition.
00:32:23 [Speaker Changed] There was competition from very credible large players.
00:32:27 [Speaker Changed] And if I recall correctly, around that time, all of the fat pipes and, and BroadB bandwidth that had come public in the late nineties, early two thousands were coming back up around pennies on the dollar. I recall Global Crossing and Metro Media fiber and all these companies. So the bandwidth was coming online at a cheap price that didn’t exist that way in the nineties, which is very much right into the sweet spot of, of Skype. Yeah.
00:32:55 [Speaker Changed] And by the way, not so dissimilar from a, the AI process processing crunch that we have today, where people are pouring a huge amount of super expensive stuff, which you do need, but which will be available three years and five years and 10 years from now.
00:33:10 [Speaker Changed] Much cheaper. Really, really
00:33:11 [Speaker Changed] Different pricing.
00:33:13 [Speaker Changed] You end up buying them, if I recall correctly, not much long after that. Did Microsoft come along and, and scoop ’em up from you?
00:33:20 [Speaker Changed] Well, what happened is, is that we bought it completely upgraded. The software changed out, the entire management team developed a series of partnerships, built a business side of it. ’cause it had been very much a kind of B2C phenomenon, right? Trying to really opened up a product line around B two two B b2. And it ended up being very attractive for Microsoft. Sold it to them, you know, one of the foundation elements in what is Teams today. And really helped them. I think it was a great, it was turned out to be a good deal for Silver Lake, but it also, I think as all deals should be a, a very good deal for the acquirers.
00:33:59 [Speaker Changed] Any other, any other memorable Silver Lake deals
00:34:02 [Speaker Changed] We’re oftentimes, you know, I, I think the maybe two others that we are well known for, we are the largest investor in Alibaba before Oh really? Before it went public. And that was a, you know,
00:34:16 [Speaker Changed] Explosive, that was giant,
00:34:17 [Speaker Changed] That was explosive, but it was a scary investment. It was a minority investment in a Chinese e-commerce company, you know, located on the other side of the world who’s
00:34:27 [Speaker Changed] Also your co your co-investor is the people’s Republic of China, right? They own a chunk, your
00:34:34 [Speaker Changed] Ultimate regulator, right? For sure.
00:34:37 [Speaker Changed] Owner slash regulator.
00:34:38 [Speaker Changed] And, you know, masas and SoftBank are already large investors, but we liked the management team. We love the story. And that turned out to be a, you know, very good. That was a very, very good investment. And then the, the last one, and, and really still very much in, in the news was Dell big, well-known public company, you know, autonomously named for its CEO, who’d left kind of like, you know, Charles Schultz left, came back first went private, where Michael rolled essentially all of his ownership into it, made a very large personal bet. So it was a gutsy bet because it was at a time, again, this is a place where the conventional wisdom was the PC was going away. We were gonna use our phones, we were gonna use iPads somehow, right? It was gonna go away. We didn’t think it was gonna go away.
00:35:36 And we thought that the market hadn’t really appreciated how much work Michael had done building up a store of intellectual property around next generation computing, huh? Whether it’s cyber cloud computing, and, you know, maybe it’s, it’s like maybe a basketball franchise that has a bunch of draft picks, you know what I’m saying? Right. Kinda young talent, which we thought was gonna be very valuable because we had a point of view about the importance of cloud. We had a point of view about the importance of cyber, and we thought that those assets were undervalued because the whole of the company was getting valued, like it was a commodity PC vendor. So
00:36:24 [Speaker Changed] Let’s talk about, what did you do post Silver Lake in the, in the 2010s?
00:36:29 [Speaker Changed] I’m a starter and a builder. I like backing social entrepreneurs and feel particularly passionate about conservation, biomedical research and education. We took our foundation resources and focused it first on a thing out in Seattle called the Institute for Health Metrics and Evaluation stood that up. Bill Gates Blessedly is doing most of the support now, but that’s now, you know, 500 researchers. And they focus on understanding in detail the global burden of disease so that we know how healthy or sick, you know, every country is, and you know, where to allocate Our healthcare dollars on the biomedical research side became very active as the chairman of Jackson Laboratories, one of the largest independent institutes in the country, focused on kind of the genetic causes of rare diseases. We’re able to double the size of that, quadruple that endowment. And then more recently in, in the education space, I had this view that we were not appreciating how big artificial intelligence was gonna be.
00:37:44 And that as a consequence, as a nation, we are underinvested in advanced computer science. In other words, we’ve got programs at, you know, all the best universities, but they graduating hundreds of people, tens of thousands, or maybe even hundreds of thousands that we need. Really? Yeah, because what’s happened is, is that the academics are focused on building the new platform, the so- called large language models, right? When think about that, like it’s a, you know, nuclear power plant, you know, complicated high science, but we now, it now works and it’ll work a little better and they’ll keep refining it and so forth. But it works. And that what we need next are application engineers. We need electricians, we need people to design appliances, we need to run wires, we need to change from steam to electricity. And we don’t have those people. And so we already know what we need. It’s gonna, by the way, it’ll be 20 or 30 years Wow. Of implementation ahead of us. So these will be great jobs for a lot of people. So we’ve built the first school, we spent, you know, a few years getting that organized, opened it in 20, we’re now, I guess four years in, we’ve got a thousand students, 200 corporate partners, and started or accelerated 94 companies, 400 jobs. You know, really exciting. You’re doing
00:39:11 [Speaker Changed] This for a couple of years. You’re standing up,
00:39:13 [Speaker Changed] I’m happy as a clam, right? I’m making things, I’m helping people. Right?
00:39:18 [Speaker Changed] You’re running the Ru Family Foundation, the RU institute. You’re, you’re basically,
00:39:24 [Speaker Changed] I was not looking to start a new business, much less an investment firm, right? What happened is, is that my very good friend, Angen Mukherjee, we were talking about the future of private equity. During that conversation, we were saying, you know, this next generation of private e needs to do something different. If we want to continue producing the super normal levels of profit that we’ve seen from the asset class, because there’s more competition, prices are higher credit’s more difficult. You’re not, you can’t count on multiple expansion. So you’re gonna have to make the business, you buy better during the pendency of your ownership. There’s only so much procurement improvements available. You can only upgrade management so far. Right? My observation was this, which is, is that I said, you know, this tech thing, it’s only 10% of the economy. When you take all of GD, when you take all of semis, all of computing, all of networking, all of software, all of social media, it’s 10% of GDP.
00:40:30 Wow. I said, what’s going on right now is the other 90% of the economy is being digitized. Huge opportunity. Now, big difference is, is that now the nature of technology is, is that it’s the only capital good. That really kind of decreases in price and makes itself smaller, right? So you think about what’s the difference between now and 20 years ago? Now, the technology’s much smaller, it’s much more ubiquitous, it’s much less expensive, and it’s much easier to use. All of those things mean it’s gonna go everywhere. So we’re talking about this and we’re getting ourselves lathered up about the fact that all of these analog companies, industrial firms, consumer firms, healthcare firms, services companies, they all need to adopt more technology. But none of them know how opportunity, in plain sight, it’s dead obvious that they’re gonna do this. Right? You think about the companies that, you know, in those kind of sectors that are doing well are almost always those that have adopted the technology earlier, right? You know, JP Morgan, Morgan in finance, or Walmart and retail, you know, those companies that get there early, get a big leg up on their analog competitors, we said we could do, we could build an investment firm that not only could write a check, but could be your technology partner in helping you architect a business model future that would allow you to grow your company faster, perform better, you know, produce more profits, you know, and drive value.
00:42:13 [Speaker Changed] So let me push back against one thing you said just a little bit, please. This, this opportunity in plain sight. Yeah. If it was really in such plain sight, everybody would be doing it. But instead it takes a couple of guys with a lot of technology experience, a lot of operational experience and financial experience to make this real. Yes. I
00:42:35 [Speaker Changed] Partially agree. Okay. All right. And here’s the partial part. The partial part is, is that I think the opportunity is easy to see,
00:42:44 [Speaker Changed] Ah, the execution.
00:42:45 [Speaker Changed] I think the execution is hard,
00:42:46 [Speaker Changed] Is the challenge part. So
00:42:47 [Speaker Changed] The way I oftentimes say it is, is that it’s easy to describe, it’s just really hard to do. And it’s hard to do because you need to understand the technology itself. You need to know the vendors. You need to be able to set priorities, you need to have a realistic sense of time, and you need to know how to weave this new technology into the processes that are already exist. It’s not like these companies have no tech. Everyone, any company of any scale has an ERP system. They have a bunch of databases, there’s compliance issues, there’s, you know, cyber, there’s there all kinds of things. So that you have to integrate into what’s already there.
00:43:34 [Speaker Changed] So when I think of private equity, at least from the nineties, two thousands, even the 2010s, I think of them as a form of financial engineering to unlock value. What you’re really describing is digital transformative capital to steal a phrase from your website. So this insight is, hey, we don’t need to just do financial engineering. If we could get these companies to adapt the latest, greatest tech in a way that’s useful and productive, we can really unlock a lot of value. Is that what led to Bay Pine getting launched and you kinda coming outta retirement to, to try it again?
00:44:16 [Speaker Changed] Yes. I mean, that was sort of angen calling for the lefty from the bullpen. Right?
00:44:21 [Speaker Changed] Right. Let’s get the lefty. So, so
00:44:25 [Speaker Changed] Let’s now it started innocently enough where it was really a, a conversation between two friends with a lot of mutual expre, you know, respect, where we had a similar, you know, 15, 20 year runs in private equity. So we were very current, highly topical understanding of what was going on. And we realized that we could take and put in one place, really, it’s like a binary weapon, right? Where a mukerjee quality world-class private equity firm with fabulous diligence, great structuring, really thoughtful modeling, you know, great financial engineering, we don’t wanna throw that away, right? You know, those are all valuable lessons, but combine it with the operating prowess, tech insight and extended personal network of relationships that would allow us to do things for and on behalf of our portfolio companies that simply wouldn’t be possible, practical, or maybe even imagined by our competitors. It,
00:45:43 [Speaker Changed] It, it sounds like your competitors are the consulting firms who come in and, you know, kind of seagull an event. They come in, they eat everything, they crap, all, everything they fly away. As opposed to you guys not only coming in with technology expertise, operational expertise, but capital writing a check. Yeah. That’s a very different relationship than paying a consultant.
00:46:08 [Speaker Changed] Yeah. You know, it’s interesting. The consultants actually play a very important role, and I wouldn’t want to diminish it, okay. Around awareness building. And when we go in to talk to a management team, they almost always have had a consulting encounter, right? Right. And they’ll have a stack of PowerPoint slides, which they’ll kind of run to their office to show us that says, the consultant told me there are 16 things that I can do with technology, but I don’t know which one I should do. Right? I don’t know what I should do first. I don’t know who should do it for me. I don’t know how much should it should cost. They’re
00:46:59 [Speaker Changed] Not gonna implement,
00:46:59 [Speaker Changed] How long will it take? I don’t know how it integrates with what I’ve already got. And I particularly don’t know what to do if anything goes wrong, right? And so it’s the, it goes back to the implementation part. And so what we like to see is a management team that has self-awareness and enthusiasm, but are not themselves technically fluent. Where, you know, we can bring that to the party in a way that can be catalytic for the management team to give them confidence because they have a willingness to act, they’re just not sure what to do, and they don’t wanna do any harmful, they don’t wanna do something harmful. And so having somebody who’s done it before been there, you know, is super useful.
00:47:51 [Speaker Changed] So, so let’s talk about some of your portfolio companies and, and how they’re engaging in, in digital transformation. We we’re talking about AI earlier. How are you guys looking at AI to facilitate taking some existing companies and making them more productive?
00:48:10 [Speaker Changed] Yeah. Well first thing we, we could spend a whole session on ai, but here’s what I would say first, we believe it is actually, despite all the hype and notwithstanding all the attention, it’s already received bigger than most people think.
00:48:31 [Speaker Changed] Yeah. I I, I’m with you on that. I, I’ll give you, I’ll give you a funny example, please. So I’m in the midst of putting together a manuscript and the publisher, they’re not keying on doing an index takes a couple of months, you’re paying a person all this time to look up every name, everything, every that for a couple hundred bucks. There’s an AI PDF indexer that will identify every proper name in 400 pages and create an index relative to, and I’m just imagining reproducing that sort of dumb mechanical work over and over and over again. And I know I’m just scratching the surface here.
00:49:12 [Speaker Changed] Very, and it’s a great, it’s a great example. And I think that right now most people’s experience of AI maybe is a chat bot, right? You know, chat, GPT or you know, or
00:49:26 [Speaker Changed] Any, any go to any car company, you get that popup, right? And, you know, that’s not a life person at two in the morning.
00:49:33 [Speaker Changed] But what I always say is just imagine all the best AI current ones today. And by the way, the the ones that you’re seeing today are the worst that you will ever see.
00:49:44 [Speaker Changed] Right? Right. A little better every day.
00:49:47 [Speaker Changed] Worst you’ll ever see. They, they read, they write, they hear, they see they can compose poetry, music in any genre, photorealistic images. They can create video all of this today, right? Right. This is all available today. They also write computer code as well, or better than most programmers. They can do complex mathematics, they can solve puzzles, they can play games, they can run factories, they can drive cars. It is really hard to overestimate what’s possible. And we are standing really for the first time after decades of discussion about it on a, on, you know, on the brink of real white collar, dramatic white collar productivity gains. Really dramatic. Best example that I would use for you to, to kind of give you a framework for it, is, is that you’re gonna see a lot of AI show up as features in products that you already use.
00:51:04 Like, you know, all your Apple products, right. Will have it soon. The first thing you get with is probably a product that will be agents, you know, something that works with you like a partner, right? Like a writing partner that you would use, right. Sort of, of a, you know, think about, it’s a more advanced version of what you were just describing, right? The best thing out there right now to illustrate that is a product called copilot from Microsoft, which works with a software engineer. You have it running on your machine and it’s basically a programming buddy that will help you write codes, suggest different options, you know, help you debug, track, blah, blah, blah. And it typically improves productivity, 25 to 50% out of the box Amazing.
00:51:52 [Speaker Changed] And then just gets
00:51:53 [Speaker Changed] Better and can be up to a hundred percent, right? Right. It all by itself has dampened the demand for computer programmers
00:52:03 [Speaker Changed] Really
00:52:04 [Speaker Changed] Because it’s made the ones that we have so much better. You,
00:52:07 [Speaker Changed] You’ve just do, you’ve, you’ve doubled the effective productivity
00:52:11 [Speaker Changed] Ca up to, but think about it as very dramatic, right? You know, if you had five, maybe you need four, if you, you know, right. It, it’s just a really significant improvement, which makes it practical to imagine that you’re gonna be able to do this in law firms and accounting firms and consulting firms where you take your average employee and make ’em as good as your best.
00:52:40 [Speaker Changed] So let’s take an old economy company that’s not traditionally tech oriented, right? You guys own Mavis Tire Express Services. Yes. How does a consumer service business like that get digitally transformed? How you
00:52:55 [Speaker Changed] Monitor o walks into our office and said, I know everything in the world about tires. I know where to buy ’em, know how to store ’em, know how to put ’em on, know how to rotate ’em. I know how to balance ’em, I know how to align ’em nothing. I know everything about tires. I know anything about technology, but I have a very strong opinion that technology could help my business. And I just don’t know where to start. Huh? I’ve got, he had talked to a bunch of consultants, he had lots and lots of ideas.
00:53:25 [Speaker Changed] And there are hundreds of these Mavis stores, right? Aren’t it? Thousands.
00:53:29 [Speaker Changed] Thousands. There were thousand Mavis stores when we first started chatting three years ago. So it’s a, you know, it’s a good size. Yeah. It’s a good size business. Very well run. Nice growth, profitable. So it wasn’t, not a business that’s broken, but a business where the management team had a felt need around the opportunity to make it better and, and, and really steal a march on their competitors. And so what we did is sit down with them and say, look, here are six different use cases that you know, you might wanna think about. Here’s a way around, you know, digital marketing, here’s a better customer experience, here’s what you can do around inventory management. Here’s labor productivity and capacity utilization planning. Here’s dynamic pricing. And we went through an entire kind of, you know, brainstorming session around that produced a whole plan. So, you know, usually when you do a new investment, you’ll do an underwriting and we do a normal financial underwriting like everyone else.
00:54:41 What’s different is we also do, in addition, a separate digital underwriting where we talk with the management team to create, you know, a technology roadmap for the enterprise that integrates with their business model and extends it to create performance improvements. And what we did with them sat down, we got better digital marketing so that the search engine’s optimized for, if you’re calling and writing in, I’ve got a, I got a flat tire and I’m in Poughkeepsie, then here’s where you go improve the customer experience. So, you know, you know when to bring your car in limit wait times, accurate estimates of how long it is gonna take, what it’s going to cost, what your options are, dramatically improved kind of labor utilization in the shops, capacity utilization, got the pricing right so that we manage margins and customer expectations appropriately. All of that. Some of we could, we could get done in two days or two weeks, but some of those things has taken us two years to put up. The end result though is, is that the business is now more than twice as big, huh? Roughly twice as profitable. Wow. And that’s not all due to the digital, but the digital is very fundamentally enabling of that growth. As you might imagine, if you’re opening new stores, it’s a lot easier to do if you do the same thing in every single store. Right.
00:56:18 [Speaker Changed] So, so let’s do a talk about another portfolio company, Hollywood. Yeah. High density, polythene, outdoor furniture. How can technology improve that?
00:56:29 [Speaker Changed] You know, it’s an interesting business. It’s a specialty manufacturing company that builds kind of very high quality, feels like wood, outdoor furniture, very durable, colorful, but doesn’t chip doesn’t fade, doesn’t
00:56:51 [Speaker Changed] Need to be painted,
00:56:51 [Speaker Changed] Doesn’t need to be painted, don’t have to take it in during the winter, any of those things. So that’s sort of the fundamental value proposition of the thing. But here’s the difference, which is, is that we said, look, you guys are manufacturing guys, people who built it, and they’re really good at the, because they use recycled plastic, so it’s incredibly sustainable. You know, they drill the holes, they do the trimming, they just take the plastic waste, put it back in the top. So it’s a zero waste, highly sustainable, fantastic story. During Covid, they grew their online business a lot. They’re not marketing people, right? Right. So we’re able to show them how to significantly improve yield on their online e the e-commerce side of the business. We’re able to, and we’re able to do that by the way, very quickly, almost instantly around that able to, to see how to get to new adjacent market areas based on finding more people like the ones who are, you know, already buying.
00:57:54 [Speaker Changed] Once you identify a customer you want to be able to identify or, well, once you
00:57:57 [Speaker Changed] Identify them electronically, then it’s a lot easier to find that electronic signature.
00:58:01 [Speaker Changed] Similar people. Similar
00:58:03 [Speaker Changed] Customers, and go look for it online rather than waiting for people to find you. Huh. The other thing that we’re doing there is, is that we have highly automated manufacturing. And so that we can, we can take the manufacturing and instead of manufacturing 20 or 200 chairs, putting ’em in a warehouse, sending ’em to a distribution center or a store and hoping somebody buys ’em, we can instead take an order, build the chair, send it to ’em. So it’s not just, just in time, but it’s real time that creates pull. So that dramatic improvements in efficiency, but it also makes it hard, easier to do custom things, improves turnaround time. You get your furniture much faster. Those would be good examples. Huh.
00:58:51 [Speaker Changed] Really, really interesting. I only have you for a few more minutes, so before I get to my favorite questions, let me just ask you one last question. We talked about the Roof Family Foundation and institute. Briefly tell us a little bit about what you focus on with the Roof Family Foundation,
00:59:09 [Speaker Changed] What we like to do is find social entrepreneurs, folks who are looking to make scale impact in education, particularly educational access, conservation, you know, kind of environmental things, biomedical research. And then a particular focus of mine is around helping support veterans and their families. Hmm.
00:59:38 [Speaker Changed] Really, really good stuff. All right. So this will be our speed round. I have about four minutes, five minutes to get through five questions. Let’s just do this quickly. What’s keeping you entertained these days? What are you watching or listening to
00:59:54 [Speaker Changed] Right now? My wife and I are watching the Lioness in the Diplomat.
01:00:00 [Speaker Changed] We’re about halfway through the Diplomat, so no spoilers. Yeah. Season two.
01:00:04 [Speaker Changed] Good. We loved The Crown. And I am waiting anxiously for season two of Wolf Hall, the Henry VIII and Thomas Rummel story in POD podcast Land. My current favorite is Fall of Civilizations by Paul Cooper.
01:00:25 [Speaker Changed] Huh, interesting. Tell us about your mentors who helped to shape your career.
01:00:31 [Speaker Changed] You know, I’ve had a couple, I’ve been very fortunate. Early guy. I was a guy named Chuck Glover. Was a newspaper guy who ended up running Cox Enterprises, the media company. He, he funded my, Cox funded my first company. He was a newspaper guy. And, and the key lesson from him was, look, I had to put out a product every day. And so just getting in the habit of putting one foot in front of the other, making a little bit of progress every day and just keep going, was really valuable. The other guy who was great for me was Dr. Frank King. What I learned from Frank, he was the head of engineering at Lotus and had had a similar job at IBM before that. What I learned from him was that the people were more important than the products. And that building your organization primacy of people, and particularly always being recruit, you know, always recruiting, being kind of on the pro all the time was super
01:01:39 [Speaker Changed] Valuable. Let’s talk about books. What are some of your favorites and what are you reading currently?
01:01:44 [Speaker Changed] I, I’m a Mark Halprin fan. I love Paris in the present tense. I like Don Winslow. City On Fire is one of my favorite books. First in a trilogy with City of Desire and City of City in Ruins. I like anything by Dennis Lehan, anything by Elizabeth Strout. And I’m currently just finished The Magician by Edmund Deval, just reading the Hair with Amber Eyes. Also by Edmund Deval. Huh.
01:02:19 [Speaker Changed] Interesting. Our final two questions. What sort of advice would you give a recent college grad interested in a career in either private equity or technology?
01:02:30 [Speaker Changed] You know, I always tell ’em the same thing. I always tell ’em to do something else first. And I say that because I’m a great believer in domain expertise. And so I usually counsel younger folks coming outta school to go learn an industry and or learn a craft, learn a skill, be, you know, be good at marketing, be good at sales, you know, be good at finance. Pick, pick something where you’re really good at it. ’cause it gives you a, a cache and a standing that you don’t otherwise have. Huh.
01:03:07 [Speaker Changed] And our final question, what do you know about the world of private equity investing today that might have been helpful back in 1999 when you were first standing up Silver Lake?
01:03:19 [Speaker Changed] I wish I knew how important it was to be first. Really? Huh.
01:03:27 [Speaker Changed] How
01:03:27 [Speaker Changed] Interesting. I think, I think as an operating person, I, I probably intuited it and understood it. ’cause I, I kind of saw it around me, the advantages that accrue to a, you know, a category leader, you just don’t need to be as good. You know, think about, think about Elon Musk. You know, his first electric car was a bundle of borrowed parts and components. It barely worked. It was hugely expensive. Literally
01:04:00 [Speaker Changed] A lotus salon with laptop batteries in,
01:04:02 [Speaker Changed] Adjust with laptop batteries in it, wired together with, so, you know, with soldering wire, cost of fortune credibly uncomfortable to drive, totally unreliable,
01:04:12 [Speaker Changed] Gotta start somewhere. But
01:04:15 [Speaker Changed] He was able to do that for years and years and years and learn and learn and develop, you know, an expertise and, and some skills. Same thing’s true for, if you think about it, Jeff Bezos, right. Selling books that no one wanted, right. Losing money hand over fist for a decade, but building infrastructure, building experience, learning lessons, you know, creating a team that became the basis for, you know, both of those things didn’t work until they did. And boy, when they worked, they really worked great. They
01:04:48 [Speaker Changed] Really worked. Thank you David, for being so generous with your time. We have been speaking with David Ru. He is the executive chairman of Bay Pine Private Equity firm focused on digital transformation. If you enjoy this conversation, well check out any of the 500 plus discussions we’ve had over the past 10 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. And check out my new podcast at the Money Short discussions with experts on specific topics involving your money, earning it, spending it, and most importantly, investing in it at the money, wherever you find your favorite podcast. And in the Masters in Business Feed, I would be remiss if I did not thank the correct team that helps with these conversations together each week. Anna Luke is my producer, Sean Russo is my researcher. Sage Bauman is the head of podcasts here at Bloomberg. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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