Private Equity's Next BIG Bet

Welcome back to The Deal Room and a popular episode format we've done in the past with yourself, Stephen. It's the 5 topics in 5 minutes, the 5 in 5. So we're going to rekindle some old spirits here and we've got 5 topics. And what you can expect from this conversation is Reddit smashes Q3 earnings to become the most successful IPO of the year. We'll unpack that one. Then Goldman's been on the road in the Middle East and sounding optimistic on the outlook for deals, so could be a useful one for context more broadly in the M&A space. Uh, Sequoia to rake in more than $100 million from a crypto acquisition. Yes, crypto still is a thing, it's still happening in the background, enough so that people are still investing. So interested to hear what the latest is there. I must admit I'm a little bit Uh, not on the beat, I would say, of the crypto scene these days. So eager to find out more. Then story number 4 and 5, Boeing launches a $19 billion share sale to thwart a downgrade. And finally, some private equity, the next big bet. What is it? You'll have to stay tuned. So, uh, Stephen, Reddit. I know, you know, we did an episode when they very first IPO, and I think you put forward The bull case. So you're looking quite smug. You're looking quite happy. I'm expecting some big numbers came out last week.

Well, yeah, I really wanted to, uh, I tell you what, I really wanted to look back at some of the podcasts that we did in Q1 of this year just to see what our conversation was like around Reddit. And Reddit was a hot topic, uh, in, in, in February and March because its IPO was so hotly anticipated. It had been on the verge of IPOing for 3 or 4 years. It was this massive very, very high throughput. I think it's the third most visited website in the US behind Google and behind YouTube, but it never really figured out how to turn on the revenue spigot. And we actually did a poll just, I think we did a podcast on the day of the IPO. We did a poll that went out to users and we said, look, are you bullish or bearish? 53% of you said you were bullish, 46% of you, or maybe 47 rounding up, —said you were bearish. And Ant, unfortunately, I did listen to that podcast again, and you were pretty bearish back then.

Did I explicitly say sell though? That's the question. Do I need to get my lawyer involved?

You didn't explicitly say sell. So you were kind of, you were slightly on the fence, but I was pretty bullish. I was talking about the, uh, the number of daily active users, the user growth. I was talking about the AI applicability using Reddit's data for training, uh, for training, uh, generative AI. And I invested. And it's been a pretty good one. I think it's probably been the best investment in my portfolio so far this year. And that is a representative of the fact that Reddit has gone absolutely Great guns. So last week it put out its latest Q3 earnings report and shares jumped a further 22%. And this is because, I mean, across the metrics, things are flying for Reddit. Their year-on-year user growth is up 47%. Their earnings per share, 16 cents versus a loss of 7 cents expected. So the Street expected Reddit to be making a loss on an earnings per share basis. They beat that with a 16-cent gain. Revenue was $348 million versus $312 million expected. And their forecast for Q4 was so much more bullish than anyone expected on the Street. So this is a company that having been a little bit of an oddball, let's be honest, uh, in terms of the way that it, the way that it's tried to monetize and it's always been very community driven, it's actually starting to leverage, uh, its, its user base. And one of the key stats is revenue per user. Again, how can you monetize that user base that's on your website? And the revenue per user for Reddit this quarter was $3.58. Beating analyst estimates of $3.24. The last thing I'm going to say about this before we move on to a little bit, little bit of a recap of IPOs this year. What's driving this share price beyond the fact that it's starting to turn into a normal looking company, a money making company as opposed to a loss making company, is this AI story. So it's got this kind of little sprinkling of the AI dust to, to juice the share price. And now we've, now the company's valued at almost 12 times revenue, which is pretty punchy. It's not kind of NVIDIA levels of valuation multiples, but this is because not only are they growing at 47% year on year, but because that data set is so rich and so thick, every time you hear $100 billion being invested in generative AI across the tech landscape, part of that $100 billion needs to go in acquiring the training data to be able to build the likes of Claude, the likes of ChatGPT, et cetera. And they've already struck a couple of deals worth $300 million, uh, $200 million with the likes of Google, uh, back earlier on this year. So I, I dunno about you, Ant, I'm a bull.

Okay. So you've got the, uh, your initial framing of your pitch that we had beginning of the year. You've now got the realization of some of that coming to reality. I guess now that their share price has moved as it has done, where do they go from here then? So does it now start to become more tangible in terms of there was a concept to be proven, which is being proved, but now does it get progressively more difficult to start scaling up?

Yeah, it's, it's really interesting, isn't it? Because now Reddit needs to prove that it can grow 47% a year, year on year to catch up with that 12 times revenue multiple in the same way as NVIDIA's valued at a 30 times revenue multiple. But because it's growing at nearly 100% a year, it will catch up pretty quickly and fulfill those lofty investor expectations. And what's also quite interesting about Reddit is unlike NVIDIA, which is now worth, what, $3.5 trillion last time I looked, which is quite crazy. Unlike Nvidia, we are building Reddit from a very low base. It's only got a market cap of $13 billion. So in terms of where it can go, the third most traffic website in the US, you know, it wouldn't be ridiculous to think of it as a $100 billion company in a few years, in a few years' time. By the way, this is not investment advice. This is just pure speculation. And just to kind of tone ourselves down a little bit, Reddit is bucking the trend of a couple of other mid-cap tech social media companies. So Snap and Pinterest, not particularly similar companies, but operating in a similar space, and they haven't really reached escape velocity like a Meta. They've declined over the last 6 months on weaker growth trends and forecasts. So it's really interesting to see how Reddit's trying to break through, break free and kind of jump up. To those kind of meta levels.

Okay, well look, we said 5 and 5, so should we move on to Goldman's and talk a little bit about that? Because one thing I always have an issue with, with when sell-side institutions are talking about the M&A market, it always feels like perhaps I'm a cynical kind of guy that they're talking the market up to facilitate their own business. But prove me wrong, prove me there's more than meets the eye here. And what is the state of play as far as Goldman CEO Seize.

Yeah, so this was a headline that I think you covered in the Market Maker last week. So Goldman's— so the headline is Goldman's David Solomon sounds optimistic note on outlook for deals. And there's a couple of things about this story. So the first is you are absolutely right. Everything that a CEO says, there is an agenda to and an angle to. CEO of a major financial organisation should not be saying anything off the cuff. And yes, there may be periods of time where the narrative, the PR is trying to sound bullish in order to drive, you know, in order to drive their own book, in order to get the kind of animal spirits going across the industry. And you see that quite a lot. And one of the quotes from this interview with Bloomberg was, when you look at technology and investments that is necessary to power artificial intelligence, buzzword, that is a tailwind for dealmaking. Okay. So that sounds, you know, David Solomon's pretty bullish, but then something else that he said later on in this interview that I thought was really interesting. There are some headwinds on the regulatory side. Obviously with an election, we could see a change in that context. Now, does that sound a little bit like Solomon's hoping for a Trump A Trump win in November? I don't know. What do you think?

Yeah, it does sound a little bit like that to me.

Yeah. Yeah. It's interesting. And obviously we saw this with Jamie Dimon a couple of weeks ago, that line between big finance and Washington is pretty blurred and there is lobbying to be done. And I think that all the major banks would much rather see a less stringently regulated deal-making environment and banking environment. So again, nothing, and this is why we pore over everything that the CEOs say, nothing is said without having screened it, stress-tested it, and there's reasons behind this. But the other thing that I want to talk about just in the context of this short piece is that David Solomon was saying this at the Saudi flagship Future Investment Initiative at Riyadh, held at the glitzy Ritz-Carlton Hotel. It's the 8th version of this investor summit that brings together the great and the good, basically trying to get their hands on a bit of Saudi cash. But as you know, Anne, and as we've discussed previously on the podcast, you know, the Saudi economy is very much dependent on oil prices and they have spent big on all sorts of different things over the last few years. They've obviously got hundreds of billions of dollars that are going, going into internal projects like NEOM and things like that. And actually the narrative of this conference, which is quite an interesting shift for anyone that's thinking about macroeconomics and global politics, is away from how does Saudi become the engine, the monetary engine, the investing engine for the rest of the world. To who can invest in Saudi. So actually David Solomon was there announcing that Goldman Sachs are gonna have an office in Riyadh, joining the likes of Rothschilds and Mizuho, the Japanese bank. And the goal of the Saudi government now is foreign direct investment, i.e., internal investment into Saudi, of $100 billion a year. So just really important to kind of understand that due to the due to the softening of the oil price and due to the largesse of the Saudi investment fund over the last few years, they started to pull back. And it's not like what it maybe was a few years ago, you know, all right, I need some money, let's call the Saudis. Those days are gone, certainly in the short term. I'll do something better.

I'll open up an office in your country instead. I did see that and I just, it made me wonder, uh, I've never been to Riyadh. I wonder what the financial district looks like there to give some context. Like Goldman Sachs opens an office there. I don't know how many employees that is or what other players are there. And I'm assuming that they're going to follow the Saudis, a model of like you have in China where you have a special economic zone, which is not, applies certain different rules so that the it can be super competitive in the global landscape. Yeah, I think you're right.

I mean, I put a little photo in our notes, and it's actually a complex. The financial district in Riyadh is a complex that's bigger than Canary Wharf. It's pretty impressive looking. And I think this— it was built a number of years ago, and I think the expectation was that it would get filled up and it would all be extremely exciting straight away. I would expect that the vacancy rates on the high-rise buildings that I'm looking at right now are still relatively high. But that's the kind of the mission of this big conference and the mission of the Saudi government to get the likes of Goldman putting a stake into the ground and saying, look, we're here to stay. We're going to take up a decent-sized office in Riyadh. Okay, cool.

So we kind of got it all here. We've got M&A, IPO, Uh, we've got a bit of debt capital markets, bit of PE, and now a bit of VC. I thought we could pivot a little bit, but perhaps, um, with Sequoia, I'm, I'm sure a lot of people know who that is, but perhaps before we dive into that story about this crypto acquisition, who exactly are they?

Yeah, so Sequoia is one of the most famous old-school venture capital firms in the US or in the world. So I would say in terms of the big beasts of VC, if we're saying, all right, I'm going to raise money from the 4 or 5 best kind of blue-chip VCs, Sequoia would be up there, uh, along, alongside maybe Index and Benchmark and, uh, Andreessen Horowitz and, and a couple of the other big players that you probably see on quite a lot of top company cap tables. So Sequoia, what we, What, what was really interesting about this, this headline, and the headline is Sequoia to rake in more than $100 million from crypto acquisition. What we often talk about when we talk about, uh, VCs and we talk about startups, we often talk about big funding rounds, whether it's with Mistral or OpenAI or SpaceX. We don't often talk about the exits because maybe they don't get spoken about quite so much. And because the lead time between investment and exit is often so long. But what is really interesting about this one is just as a, just as a background, we need to remember the way that venture capital firms work, right? So VC firms, unlike private equity, unlike any normal investments, they are more than happy. Well, maybe they're not happy, but they expect 80% of their investments not to provide a significant return on investment. You know, if 8 out of 10 companies within a fund die. That's kind of expected. But they just need one or two to really go ballistic in order to make the fund. Think about it this way. If I have Amplify's $10 million VC fund, and I invest a million quid in 10 companies, or a million dollars in 10 companies, 9 die, but one's an absolute superstar and returns me $30 million. Well, I've made 3 times my money because I backed one of the right horses. And this is exactly what Sequoia has done here with the cryptocurrency company Bridge. Now Bridge is really interesting. It is a, it's actually one of the more sober cryptocurrency platforms. It helps transact stablecoins. So those coins that reflect the value of a dollar or a pound, and it was acquired by Stripe. And Stripe have a clear intention to become the leader in stablecoin infrastructure. They're already a massive company in payments, massive payments infrastructure company. So this was definitely an acquisition based on the technology that Bridge has built that can be integrated into the strategy and the scale of Stripe. But what is interesting about this is that Bridge is only 3 years old and it got sold for $1.1 billion. Now let's put this into economic terms for Sequoia. Sequoia owns 19% of Bridge and it invested— sorry, it owns 16% of Bridge and it invested $19 million in their Series A round. So their return is just over 9x. Which is pretty punchy. It's not a bad return. And when you think about it, the two main metrics that we look at in the world of private equity and venture capital are money on money. So 9x return and also the internal rate of return. So that 9x is good, but the fact that it's 9x in less than 3 years, that's even better because we want to be able to condense that payback period and recycle the money. So this is just a really good case study for how VCs work. And this is just a massive win for Sequoia. Put in $19 million, less than 3 years later, take out well over $100 million.

Happy days. Money makes money, Steven.

Yeah, I wish I had a piece of that, but never mind.

In another life, there's a parallel, you and I just picking up, backing 10 horses. But let's move on to the Boeing story and then the PE story to finish. So Boeing launching a $19 billion share sale to thwart a downgrade. So I guess tackling this in two parts, the share sale, what is that? And then what downgrade and what does that, what implications does that have for a company?

Yeah, this is super interesting and I love the fact that this, yeah, these 5 stories, they've covered IPOs, M&A, venture capital. We're going to do a little bit of rights issue. Equity issuance, and then we'll finish up with a little bit, a little bit at the end. So the headline is Boeing launches a $19 billion share sale to thwart downgrade. Now Boeing is one of those companies that as a student, you probably should know about what's going on at the moment. It is such an interesting case study in a company where everything has gone wrong over the last 2 years. You've had bad news after bad news, you know, doors falling off planes, crashes, you know, lots of safety and technical issues. In fact, the share price is down 40% year to date. So it's really been on a very, very bad tear. But remember, it's still a duopoly. This industry is still dominated by Boeing and Airbus. So it can probably, can afford to get a lot wrong and still be the second absolutely essential maker of planes. But that's not to say that the short term isn't extremely tough. And what's been going on is because, because the share price has been going down, because the company is actually losing quite a lot of money, it's gone from being profitable to loss-making. And because there has been a strike, a strike that's now in its 8th week, it's a machinist strike. So 96% of the 30,000 machinists that work for Boeing, uh, wanted a strike and have gone on strike. They're holding out for a 40% pay hike and a return to a defined benefit pension model, which we won't go into today, but it's a relatively punchy request. And despite Boeing going back and saying, look, we'll do 35%, they're still holding out. Anderson Economic Group have estimated that the cost of this strike to Boeing is $9.7 billion because without the machinists, this company doesn't run, right? So what do they have to do to steady the ship? Well, they are going out and raising $19 billion of new equity through a rights issue. So when you're a public company, you can tap the public markets for future equity injections. Through a rights issue. So it's kind of the next stage on from the IPO. Once you've gone public, you get access to these capital markets. And the reason they're doing this is not only because they need money, but also because their credit rating is teetering on the edge of junk status. So the world of credit rating agencies, you have investment grade and you have high yield. and there is that. And if you're an investment grade company, happy days, you get access to a lot more cheaper financing with regards to your debt financing. If you flip into junk status or high yield status, a lot of investors just won't go near you. They'll have a mandate not to invest in you, and it will cost a lot more. And currently Boeing is BBB- with S&P and Baa3 with Moody's. This is right on the kind of relegation zone. And if they fall down, the next stage is sub-investment grade. So they need this $19 billion, A, to realign their coffers and get their cash position in a much more stable state, which is something that credit ratings agencies definitely look at. They need to improve their debt-to-equity ratio. So this is a big, a big jump in your equity relative to the amount of debt you've got, and it is likely to keep them at least in the near term within that investment grade bucket, hoping that they can resolve the machinist strike. And by the way, they've still got half a trillion dollars of back orders for their planes. So if they can sort their ship out in the near term, things might just kind of start to, start to get a little bit better. But this is why they need to raise this $19 billion. It's mad.

Well, I'm assuming that one person's loss is another person's gain. I'm sure the bankers are just sat back, feet on the table, picking up the phone. Yeah, of course I can do that for you. No problem.

Yeah, absolutely. And look, you know, who's getting a slice of the action? Well, the lead bookrunning managers, Goldman Sachs, Bank of America, Citi, JP Morgan. And because this is such a bumper rights issue, $19 billion is, is up there with the biggest ever, right? Wells Fargo in on the ticket, BNP Paribas, Deutsche Bank, Mizuho, Morgan Stanley, RBC, SNBC, and they will all have a slice of that $19 billion pie that they have to allocate to their investor base. SNBC will probably be taking, well, SNBC and Mizuho will be taking Asia, and then you've got DB in Europe, and then you've got the American banks covering America. So it's Yeah, it's a good payday.

Let's just say that. Yeah. And a final point, just quickly to conclude that story before we move on to the final one, is that if you are monitoring markets on a macro perspective month to month, and obviously trying to ascertain information as to where interest rates are going to go in the future is super key to all things corporate finance as well. Those Boeing strikes on that magnitude, they do feed into and need to be considered when you're monitoring the payroll. Labour data that we get, which is a key component focus now that we've pivoted from inflation to the labour market. So something just for the market side, but let's move on and let's talk about private equity's next big bet. So what is this big bet?

Yeah, we're going to round this off with a bit of private equity. We've really covered all the bases today, and I would definitely encourage you to look into all of these stories if you are interested in particular areas. But the headline is that private equity's next big bet is nuclear, nuclear energy. So it's such an interesting one. And nuclear has, has forever been the almost technology capable of transforming the way that we think about carbon-neutral energy. But it's had a really bad press, whether it's Chernobyl over in Europe or Three Mile Island in, in, in the US. It's not been deemed to be extremely safe, even though it's one of those things that, you know, you always get a little bit like airlines. You always think, oh gosh, flying could be a little bit risky. It's probably, well, it's definitely a lot safer than getting in your car. Nuclear's a little bit like that. We all hear about the tragedies, but it is an extremely safe carbon-neutral technology. And remember, I dunno if you remember this, a few months ago we discussed, um, the likes of Brookfield, big infrastructure asset manager, real estate asset manager, going big on AI infrastructure, the data centres that power artificial intelligence and this AGI revolution. Well, what we're actually thinking about now is one step behind that. So who is going to power and what is going to power these data centres? So again, when you're looking at this kind of AI stack, Yes, you look at the software layer on top, then you look at the algorithms that have created the vastly highly valued companies of, uh, of ChatGPT and Anthropic, et cetera. But then you look behind that and you look to the data centers. Then you look behind that, you look to the energy, and you look behind that, you look to the training sets and the, and the information that these algorithms are being trained on. There's a lot of money that is trickling down and private equity, they're not going to be particularly interested in backing an Anthropic because it's highly speculative, loss-making, extremely capital-intensive. That's the kind of VC world. But what does private equity like? It likes as close to as possible a sure thing. And if you invest in nuclear or you do project management and project financing, for new nuclear reactors, it, you, it provides you with utility-like returns once you, once you turn it on. Right. In fact, in the UK, nuclear power plants benefit from a government-guaranteed price that is close to a sure thing. So this is really interesting. You know, nuclear had a really bad press and it's also been affected by cheap shale-related gas, and also been affected by the lower cost of wind and solar. But remember, in this move, in this move, this grid move to massively increased electrification, we need energy sources that are always on. Wind and solar are great, but they're not always on. And we don't have the battery infrastructure to support the growing demand, whether it's plugging in my Tesla or whether it's powering a data centre. So this move towards investing in, supporting, providing project finance for nuclear reactors is definitely a trend that's going to keep on going. I'm just going to finish this piece by talking very quickly about the micro reactors. I think they're called SMRs. I dunno if you heard about these things, but Rolls-Royce is getting big into SMRs and there's a US company called Kairos Power. which Google recently bought 6 or 7 of these small nuclear reactors to put them near to their data centres. So you've kind of, you've almost got a kind of closed ecosystem where you've got a nuclear reactor powering one of Google's main data centres, and that gives Google certainty over energy supply. And when, and just to finish off, Just think about verticalisation. We talk a lot about being vertically integrated as a company. Well, that's the next step for Google. They own the energy, they own the data centres, they own the AI layer, they own the software layer. And I know that their share price bumped 5% last week because of a very nice earnings report, which also made me very happy.

Yeah, that's super. I find that super interesting, that last bit you described, kind of just trying to get So young people thinking beyond the obvious and just taking that assumed position of the status quo now and thinking about strategically over the long term, the influence and how they can embed and protect that as a major tech company with cash to deploy. I'm sure these mini reactors, I'm not going to ask how much they probably cost per pop, but if the, I mean, how much was it for one of those Nvidia super chips? you know, a couple of hundred, hundred bags a pop, and then you're going to throw in a nuclear mini plant on top of that. So yeah, it's quite incredible. But yeah, really interesting actually, as you've just, you've described so many when we were talking about the oil and gas M&A deals and that vertical kind of integration and how that plays into technology. Fascinating stuff as always, Stephen. But look, any questions at all that you might have, any comments, any thoughts, any topics, then please feel free to leave us a comment. I know you can on Spotify and we reply to everyone. That's a promise. So make it so. Thanks, Stephen.

Thank you, Ant.