FOUR Things We Learned From The World Economic Forum (WEF) In Davos This Year!

Hello and welcome back to The Deal Room. And what we're going to talk about today is something called Davos, and we're going to use that to kind of talk about a couple of the themes coming out of Davos, uh, that are particular interest around private equity, AI, so all of the good stuff. But we thought a lot of people who might listen might not even know what or where Davos is. The importance or not of that event. So we thought we'd start with perhaps a little bit of an explanation, because I think if you're going to go and work in probably any corner of finance, you probably will come across this on an annual basis, because it does touch on nearly every part of the financial spectrum, from investment banks to PE to asset management and everything in between. So yeah, Stephen, perhaps you could kick us off with what is this? Event.

Ah, Davos. Well, I'm quite disappointed actually that you can see my screen. I don't have nice mountains in the background.

You haven't, you never been to Davos? I know you used to move and shake in a few political circles back in your youth. I mean, you never got the invite?

No, never got the invite. It's a very, very, well, there's only 1,600 people that get invited. And so far, Despite banging on the door, making my case that I should be their keynote speaker, I've never been invited. So Davos, what is it? It's something that we are not at at the moment, but if you are watching Bloomberg News or any of the other financial news channels, you will see leaders and executives nicely framed with blue sky and snowy mountains, and they're all having a great time at a place called Davos in Switzerland. And this is the annual meeting of the World Economic Forum. It is where the movers and the shakers of capitalism and liberalism come to wine and dine and nod along to keynote speakers saying all the right things. So the first meeting of Davos was in 1971. So this is the 54th edition. As I mentioned, there are 1,600 business leaders and heads of state, entrepreneurs and young leaders that are invited every year. This year we've got Jamie Dimon, Satya Nadella from Microsoft, Emmanuel Macron, Zelensky, Ursula von der Leyen. So quite a lot of the big names, you know, again, if you were to drop a bomb on Davos, you know, you're going to be removing the real crème de la crème of movers and shakers. And so much so that Davos has become a bit of a meme. In financial circles. It was back in 2004, a guy called Samuel Huntington termed the phrase the Davos man or the Davos woman, a kind of private jet owning executive making globally important decisions, kind of like the global elite. I was just thinking to myself, actually, I might ask you the question, who would you say is the ultimate Davos man or Davos woman? Who is that person that just fits in with this global elite making decisions, prognosticating on all sorts of interesting things. Who would you put down as the ultimate Davos person?

Well, someone who I've always been a, and still am a big fan of. However, she is Davos all over. Christine Lagarde, her tan, her fashion sense, her pizzazz. Her slightly shady dealings when she was finance minister. She's a Davos woman for sure.

Yeah. Well, she's there. She's there this week. So I reckon she's probably been every year for the last 20 or 25 years. Yeah. I was thinking maybe Tony Blair. He's quite a, you know, Tony Blair consultancy, jet setting, you know, on the board of various things, talking a big game, you know.

This is his main roadshow of the year. Did you not know that? This is where he goes. This is where he literally sets his business deals for the next 5 years, every year.

So I have this thought. Obviously, Davos is a ski resort in Switzerland. I have this thought of a real elite CEO, a kind of Bill Gates or something like that, just coming and learning how to ski on the beginner ski slopes, falling over and being laughed at by the rest of the global elite. Maybe that doesn't happen, but I like to think it does.

Would you say the most in-demand person at Davos this year is Sam Altman? Would he easily take that this year, do you think?

Yeah, I mean, we're going to talk about AI. That probably is again in the word cloud of Davos conversations, both in the conference room and in the bars and the side meetings. I would suggest that AI generative, AGI is going to be the talk of the town. And therefore the likes of Altman, the likes of Satya Nadella of Microsoft and a couple of other ones that we'll talk about are going to be, yeah, a few, you know, a couple of years ago it was Greta Thunberg and it was climate change. It still is the opening conference. The conference was opened with a concert and the title of the of this year's Davos is rebuilding trust. And the concert was basically a representation of the Sahara and the Amazon rainforest to represent our kind of climate burden and the climate catastrophe. I just think it's so strange just thinking, all right, I'm in this ski resort surrounded by Zuckerberg and Dimon, and I've got this strange representation of the Amazon. I don't, I don't quite know what's going on.

That's fine. Well, they're obviously very in-touch people, so of course. All right, well, look, let's talk about 3 topics then coming out of, out of Davos, and one maybe to kick us off is around private equity. So what, what's happening in the private equity space? It feels like it's been a couple of weeks since we've talked about this now.

Yeah, so I just tried to pick 3 FT headlines from the week in Davos and try to unpack what's going on as maybe a, a bellwether or a bit of a signal as to what's going on or what's predicted in 2024 with regards to dealmaking. So the first one is Private Equity Predicts Deal Rebound as Sellers Capitulate on Prices. So unpacking this a little bit. So as we've mentioned before in the podcast, lots of private equity firms have bought big, have filled up their funds by buying companies over the last few years. And they have been waiting and waiting and waiting and waiting to sell these companies, waiting on valuations to return to a kind of 2021, early 2022 level. Valuations have dropped off a cliff as we know, due to the rate hiking cycle, increased cost of capital. Closure of the IPO market and so on. So there's been this wait-and-see element across the private equity alternative asset industry. Can we just hold onto this company for an extra year? And instead of trying to sell it for $10 billion, we can get what we think it's worth, which is $13 billion, for example. 2024 is going to be a year of realization. And it was Pete Stavros, co-head of private equity at KKR, that said sellers have conceded to lower valuations and the pressure to meet a certain return on investment is ticking. So basically what he's saying is, look, we tried to hold out for the big valuations, but investors, limited partners, investors in private equity firms, private equity funds want their money back. In fact, Bain said that they, that private equity firms currently have $2.8 trillion of investments. So not a great deal of dry powder, a lot of investments. Bain calls it a towering backlog of potential sales. So if you're thinking from a deal-making perspective, a deal is good or bad depending on the price. Now, if the sellers are starting to go, all right, we were going to try and get we paid X for it, but now we're happy to take Y. This is going to be a real contributing factor to potentially a bumper M&A year. And we've already seen, if you look at the, if you look at the, look at the websites, we've already seen a lot of M&A activity in the first couple of weeks. It already seems to have started with a little bit more momentum than last year. And this is the one, one of the contributing factors.

Yeah, on that, on that point, the biggest deal announced in some time, actually, what, 2 days ago in the software space, a chip designer buying out a software developer. So yeah, it definitely feels like a change going through the turn of the year for sure. And irrespective of pretty resilient economic data we've had out of the States again, both on the job side, retail sales, you know, we are still cutting is the baseline expectation. It's just a matter of just reining in a little bit. So those rate cuts are inbound and people feel a bit more confident, it feels, going into the year ahead.

Yeah. And this is, it is great to get the sentiment of Davos because these are the moves and shakers both from a government perspective and also from a business perspective. So if this kind of a theme of a little bit more confidence is there, then that, that could be good for the markets in general. But I do, I want to pick up on one point. This is really, really interesting in the context of the cyclicality of dealmaking in this industry. So Scott Nuttall, the co-CEO of KKR, who of course is at Davos at the moment, says this is a good time to lean in, i.e., buy up some companies. There is less competition for deals and multiples have come down. In fact, he says, in periods like this, we have historically earned our highest returns. And that sentiment, that statement reminded me of Buffett's classic, be greedy when others are fearful, fearful when others are greedy. So when, you know, this is not a great time. Well, it hasn't been a great time for dealmaking. Confidence is still relatively low, but now's the time to pick up some cheap assets that are now for sale. So this is the time where the multiples, remember from a private equity perspective, you know, one of the key metrics is money on money multiple. What you got out relative to what you put in. So if what you're putting in is less than you thought you might have to put in, there's a higher likelihood that what you get out will be bigger relatively.

Scott pumping his book there. Yeah.

Yeah. I mean, look, well, if you're at Davos, you've got to pump your book. What are you doing if you're not? Cool.

All right then. Well, look, let's move on to the second one. And to be quite honest with you, I mean, I've not been tracking Davos a great deal, so it's a timely conversation. But there's an AI company, I was about to say small. When you hear the numbers floating around with this, it's not that small. But yeah, what have we got? What's this French AI company?

Yeah, so the second headline I want to talk about today is Mistral. It's actually a French term for the winds blowing in off the coast of Provence in the south of France, the Mistral.

How perfect for the topic.

Yeah, I know, I know, it's wonderful. Um, so Mistral becomes the talk of Davos as business leaders seek AI gains. So obviously the big theme here is let's all talk about AI and AGI in particular, and how it is going to necessarily affect businesses, governments, and the world. We've spoken a lot on the podcast and, you know, OpenAI and Cohere and Anthropic have been taking quite a lot of the headlines. US West Coast-based technology companies hitting some pretty high valuations relatively early on in their corporate careers. You know, Anthropic's a few years old, Cohere's 4 years old, et cetera. But Mistral wins the prize, the highest valuation to age of company ratio that I think I've ever seen. Feels quite dot-com bubbly. So Mistral, Artificial general intelligence company based out of France has just raised €400 million at a valuation of over €2 billion. So putting that valuation into context, $2 billion valuation on a company that was founded in 2023. And I just shared with you a picture of their team looking all smiley and happy and wearing Mistral t-shirts.

What's the value per employee on that valuation? That is mind-blowing.

So we're looking at a photo with about 15, maybe 20 employees, and that's the total sum of the employees at Mistral. It's only a few months old, yet it is valued at over $2 billion. And I was just checking out some similar listed market capitalization companies here in the UK on the FTSE 250. I was thinking, all right, I wonder how many employees other £2 billion or €2 billion companies in terms of market capitalization have. And I looked at Wizz Air, the low-cost airline employees, 7,300. Dunelm, the home furnishings company.

Oh, classic. Always got time for Dunelm.

Always got time for Dunelm. Well, look, they've got over 10,000 employees. And Balfour Beatty, the kind of construction infrastructure company, it's got 25,000 employees and they're all worth the same as Ms. Drell. She's got about 16. It kind of blew my mind when I just saw that photo and thought, gosh, yeah.

So is this a case of a new type of technology they have, new idea, or is this more FOMO from the investment community?

Yeah, there's definitely a little bit of a bubble here. I think the realization that is coming though is that this isn't a winner-takes-most market. This is such a big trillion-dollar, multi-trillion-dollar market potentially. And the realization of business use case has been there for all to see in the last year. And the speed of progress is so quick that I think people are realizing that much like the Internet boom, you know, there were 4 or 5 companies that came out of that and turned into multiple hundred million trillion dollar companies. So it's not going to be that there's just OpenAI that we should all try and pile into. It might be that OpenAI works best for a few use cases. Mistral is trying to focus on open source customizable AGI, which I think might have different use cases and different customer bases. So you might, you'll probably end up with 3 or 4. I'm pretty sure this is not a particularly big prediction. I'm pretty sure that 1 or 2 of these will become trillion-dollar companies. You need that, you know, the next wave is going to come, right? And it might be that there's 3 or 4 battling for it. So maybe Mistral's just, you know, like a horse in a race, just positioning itself quite nicely.

So are the winners here, obviously the 16 employees, but are the winners here big tech? Because to facilitate a lot of this AI has to come, you know, cloud storage capability, all these other things. And am I right? They're using Microsoft cloud? Yes.

Yeah, they're using Azure from Microsoft. So actually, Nadella came out and said, actually, we really like Mistral.

Back them all.

Yeah, yeah, yeah. So we like OpenAI. Oh, you know, fine, you like them all. Well, one of the interesting things that I was looking at today was the role of NVIDIA. I think we mentioned on the pod before that NVIDIA has taken stakes in the likes of Cohere, but they've made 35 AI investments in 2023, including Mistral.

How does that pass regulation? I'm sorry, how does that, how is that even allowed?

It does feel very, well, you say that we often talk about stakeholders when we're thinking about investing and more specifically ethical investing. We think, look, all right, every company has multiple stakeholders. You've got your employees, you've got your customers, you've got your environment, you've got your shareholders. And often it's about balancing these very separate interests. And that's the kind of skill of a great CEO. Now, when your, uh, when your client is also your investor, suddenly the weight of that, that kind of joint stakeholder overwhelms almost everything else and overwhelms the other customers that aren't also shareholders. So I totally agree. This is, you know, it's backdoor because they're taking minority stakes. It kind of falls below the threshold level for regulators to get interested. But when you're thinking about 35 AI investments, all of whom are going to be predisposed towards using NVIDIA's chips and technology. It's, it's pretty mad.

So it's hard not to be skeptical with something like Davos when all of those people involved, all 1,600 or however many you said, probably all have some skin in the game with some upside exposure to all of this. And yet they're the very ones that are setting policy to prevent a lot of that.

Yeah, it's, it's, it's nuts. It's, you know, it's the world's biggest network. Well, it's not the world's biggest, it's the world's most important networking event. And you've got 1,600 nodes, probably with pretty strong connection to multiple different nodes connecting in this vast web of Davos. And I'm sure that conflict, conflict of interest is not much spoken about, but it's definitely happening, isn't it? Okay.

Well, look, let's, let's go on then to the third one, which is Blackstone. And a comment from their boss, Steve Schwarzman, sees animal spirits returning to financial sector. What is this animal spirits? Maybe you can talk about that.

Animal spirits. Well, animal spirits is basically, I can't, I don't know where the phrase came from, but it's basically confidence in the ability to make money. So animal spirits. So I am confident. I feel bullish that I'm going to go out there and be an animal in the market. I'm going to make money. I'm going to make money and I'm going to win. That's how I see animal spirits. Maybe you've got a different definition. But yeah, so this is the headline: Blackstone Boss Steve Schwarzman Sees Animal Spirits Returning to the Financial Sector. And the reason why I picked this headline is because there was 4 or 5 of these headlines, you know, from again, keynote speakers, panel speakers, We had the Morgan Stanley new boss, Ted Pick, saying that there was going to be multiple, maybe even up to 8 interest rate drops this year, which I think is a little bit overoptimistic. David Rubenstein at Carlyle talking about rate drops, thinks the first cut will come in March. Lagarde, your favorite, hints at potential rate cuts in the ECB by the summer. So, you know, you just, you start to kind of pick up the messages here. Solomon at Goldman Sachs, we are just across debt and equity issuance seeing more activity and more engagement so that, you know, you can just sense this wave of optimism. And I think you've covered it on your podcast with peers, but does it feel like with, you know, there is momentum to get a bunch of good news out there because there's a big election coming up at the end of this year? You know, are we going to front load? Rate cuts? I know we're drifting into your territory here, so what, what, what do you think?

Yeah, again, I just can't help but think when you say all these things and you've got like each end of the spectrum from like the policy setter sat there side by side having dinner with the banker, with then the CEO of an investment bank, and then you've got the PE guys sat there, it's just Yeah, they're, they're, I don't know. I don't want to go down the trap of opening Pandora's box and speculating on all the stuff that goes on. But yeah, it's, it's definitely interesting. Could there be, your question then, could there be pressure to act with policy? I mean, yeah, I mean, I would, if I were the CEO, if I were one of these business people, I would be putting pressure on making these things happen. I mean, obviously not bluntly, but in a sophisticated way and in a unified voice from the industry and across different sectors to put pressure on policy setters. I mean, your goal, your objective is different to a policymaker. And so your goal is to appease all those stakeholders you said. So in their interest, I would be piling it on.

Yeah. Yeah. And, and who knows whether, you know, uh, bit of pressure coming in from the White House on Jerome Powell as well. Look, you know, we need some good news in H1 because you know what a mess it's going to be if Trump gets in. There's definitely that narrative that's floating around as well. So yeah, I was also just in the context of animal spirits, especially over in the US, I was just looking up, and we've covered this a lot, but I was just looking up some US economic growth and kind of macro statistics. I just want to get, I just want to get your thoughts on this. Where in the G20, largest 20 economies, where does the US rank in terms of quarter-on-quarter GDP growth out of the 20? Obviously we've got China, we've got the UK, India, Russia, et cetera. Where, where do you reckon it is?

Well, China's slowing, but it's still growing fast comparative to Western economies. So what, where is the US?

Yeah, where's the US in the terms of rankings of speed of quarter-on-quarter growth?

Uh, high, because they've been, as I said earlier, surprisingly resilient. So top 3, not bad, behind China, because China's what, 5.2%, something like that?

Well, interesting enough, they're second behind India.

Ah, okay.

So, uh, so the US, uh, economic growth in Q3 2023 year-on-year was revised up to 5.2%, which is quite nuts ahead of China. And the only economy that was growing faster than it in Q3 2023 was India out of, you know, and you think this is an extremely developed economy. Often these kind of 5, 6, 7% growth rates come from more chump economies. And so, you know, there is reason maybe for these animal spirits. You translate the macro into what's going on in the deal room. And there's reasons why Rubenstein and Solomon and Ted Picker, again, talking their own book, but talking a slightly more bullish game.

Well, yeah, I mean, to kind of conclude this point, I've got the definition of animal spirits and within the conclusion of the conclusion is this concept that basically it helps explain economic trends may not always follow rational patterns. Highlighting the influence of human psychology on financial markets and economic behavior. And I think that kind of summarizes then what events like this do. I think they amplify that pattern whereby you can put some coordinated effort into shaping what the future looks like to influence the policy setters, irrespective of them looking at the concrete factors.

That's really, that's a really interesting definition. So maybe animal spirits, taken, you know, taken back a couple of years, was the meme stock crypto 2021 boom. You know, that was dislocated from reality in so many ways, but the animal spirits were there going to the moon, HODL, all of that stuff.

I'm sure you got involved in, and not as much as I would've liked to, but yeah, exactly.

Look, we're not at Davos, so whatever.

Okay. So look, to wrap things up then, I know we've kind of slightly touched on this throughout, But I know we wanted to ask the question to ourselves to have a bit of a debate of basically, is Davos still worthwhile? And perhaps a little bit about the themes at the moment, but also what would be a positive force and a negative force about this as an event?

Yeah, I think it's, you know, so this was again another headline, is Davos still worthwhile? I think it's worth debating this and it's worth trying to, to kind of remove your cynic's hat. It's so easy to be cynical and there is good reason to be cynical, of course. And the author of this article did say, you know, what could be more decadent than traveling across the world in a private jet to discuss net zero and climate positive policies? It says it all. So, you know, I can give a load of arguments again, but what can you give any arguments for? Why is this actually a good thing? What's the upside here?

Yeah. Yeah. I, I did have a, a bit of a think about this. I've got a couple of points and, um, yeah, you're right. It, it's very, you do have to check yourself because the instant you go to is just what you've almost passively been exposed to, which is such negativity around Davos and all the things that you've mentioned. But a couple, a couple of positives because it's, we're recording this on a Friday. So fostering partnerships that might not otherwise be formed. And what I mean by this is you might, you know, a lot of these people we've mentioned, they're pretty well connected. So whether it's the Microsoft chief talking to the OpenAI chief, who's talking to the VC funding person, but you might get someone who's a policy setter or an analyst working in that domain. That might cross-pollinate with, say, from a regulation perspective, with a new technology with the French AI startup. And out of that comes positive things. It could enhance then things for good in that sense. So I think the networking effect like that is very powerful, if given the chance to happen. The other points I've got here are So the forum, it obviously, the idea is it sets things like economic, social, environmental, political agendas, things like that. It's this idea in my mind of a more unified approach. The world seemingly in 2023 feels like geopolitically it's becoming fairly fractured on a lot of key issues. And these involve all of the biggest world economies. So I think getting everyone together, I'm not going to call it a safe space, but the fact that they can all be there and have dialogue, I think is a positive thing, um, as well. Um, the other thing is, yeah, bringing together thought leaders and experts to inspire and educate one another. I know one of the things here is they do bring out research during these events where they'll come out and talk about that sort of thing. So I think that's positive to rub off on each other. And then, yeah, the other networking things that come out of this, I think, which kind of summarizes what I've said, it's not just about investments, but there might be new initiatives, solutions to problems. I don't think this is just about money, like we've kind of talked about it, trying to, I guess, lay the foundations for what that could look like in the future. There's a lot of intellectual benefit from these high-level discussions, I think, that can have a positive impact on certain things.

Yeah. And I think maybe just to end the positive notes, maybe to end on a positive note, I think as we said, you know, being a cynic makes you feel and sound smart. And obviously, you know, when you see Greta Thunberg coming to the World Economic Forum, The cynic in me would say, gosh, well, this is just a bit of greenwashing. No one's actually really listening. You know, she's a big name and it's just a nod to that particular movement. But the reality is she's got an audience and she's saying things that matter. And even if only a few percentage, only a few percent of the people that are in the audience actually, you know, have a bit of a moment and think, oh gosh, what I'm doing isn't isn't particularly climate positive and maybe have a couple of side meetings and maybe, you know, so very easy to be cynical, but there is some good stuff going on there and there are, you know, people aren't just there cynically to make as much money as possible all the time. There are some good people.

I hear the Château Petrus is particularly tasty as well.

Absolutely. Absolutely. Well, look, annual membership to the World Economic Forum costs £50,000 and I think it's about £10,000 to get the ticket and accommodation. And if we have a bumper year, 2025, we will be reporting live from Davos.

I'm actually quite interested to know, what does annual membership mean? What does that get you? £50,000 sounds like a good price to get in to some of those people.

Sounds like an excellent price. Yeah. I don't know whether it's £50,000 to be a member of the World Economic Forum and then it's invite only to Davos. I would assume it's something like that. You can't just get any old, any old You know, and Stephen coming along.

Well, I know what, well, so what we'll do is between now and next year, we'll set up a ski training business and we'll become instructors and then we'll, we'll kind of find a different way in. Maybe I could run the cafe and be the barista. You can be the ski instructor.

Yeah. As long as it's got an AGI element, you get AI in there at all. I don't know.

Cool. All right. Well, look, thank you for, for breaking down Davos for us, Stephen. And, uh, yeah, any questions at all, as I always say, wherever we share the podcast, uh, particularly on channels like LinkedIn, things like that, feel free to drop us a, a message. Any questions, thoughts, feedback, always welcome. And have a great rest of the week.

Thanks, Ant.