How Global Security, AI, and Geopolitics Are Reshaping The Investment Landscape

Most people, when they see uncertainty, they react to the headline. Real insight comes from experience, especially from people who have to make decisions when the stakes are high and the information is incomplete.

In the summer of 2006, I got a call. The British were uncovering a plot to blow up between 10 and 12 airliners. It would have been comparable to a 9/11 in magnitude.

Michael Chertoff served as the United States Secretary of Homeland Security during a period when the country was rethinking how it approached risk security, and being prepared in a post-9/11 world.

The domains of conflict have expanded. We see it now with the Straits of Hormuz.

You've got what happened down in Venezuela. You've got everything with Iran. There's the China question. There's the Russia question.

Any commercial enterprise assisting the Israelis or the United States government will also now be targets. They listed out Hewlett-Packard, Cisco, Google.

Chad Sweet served as chief of staff, helping translate decisions into action.

Risk equals threat times vulnerability times consequence. A lot of people spend a ton of time on threats that don't have high consequence.

Fast forward, you guys decide to start the Turdock Group.

We both felt a passion for security.

Risk elimination is usually not a possibility.

I've got 4 young children and thinking about the world that they're growing up in, you can't eliminate the risks of things happening to them. It's not possible.

What is it that many people are underestimating and that you would counsel them in order to be able to protect themselves?

What is important to remember where we face today is everyone is enamored with the AI and data center trade, but we're talking about $2.7 trillion.

It's a proven business model where the customers must buy because the alternative is extinction.

What is especially interesting is what they've done since then. They built the Chertoff Group, and now they apply those same lessons to how organizations think about risk and resilience. So the question we want to explore is this: What do people who have operated inside real-world crisis understand about risk, decision-making, and leadership that others may not? And how do those lessons carry over into business, into investing, and in how do we lead organizations today? With that, I'd like to bring in my co-host today, Mark Waite.

Great to be here.

Glad you're here. And welcome our guests, Secretary Michael Chertoff and Chad Sweet. Secretary, before Homeland Security, You were a federal prosecutor in New York working on organized crime. Quite a different experience, I'm sure. You played a very key role in taking down the mafia. There have been many documentaries and movies about that time period, but can you explain for us, you know, what that world was actually like? Why was that so difficult, and what made it such a challenge to do something that nobody had been able to do really before?

Yeah, well, um, organized crime had been a target of prosecution for many years, But it was usually based on a single crime or a single episode. And what we did with respect to what was called the Commission case, which was a case against the board of directors of American La Cosa Nostra, is we took a holistic approach. We looked end to end at the way they operated and tried to find vulnerabilities that could allow us to take down the entire enterprise. So it was really escalating. From an episodic-focused prosecution to an enterprise-focused prosecution. That, by the way, turns out to be not a bad model for what we did years later with terrorism. So we took together assembling, uh, uh, wiretaps and, and other kinds of surveillance, physical surveillance, uh, witnesses, uh, laboratory work, for example, with respect to a homicide. All of that was assembled and we had to put it into a narrative where the pieces fit together and were able to communicate to the jury a story that had a beginning and a potential ending so they could really grasp it. And that worked out very well. Everybody wound up getting convicted and getting 100 years or more in prison.

So that's a lot and that's obviously a huge victory. If I could maybe parrot this back to you a little bit, make sure I'm following you. Effectively, you had to create a spider web of connecting all of these dots and bringing them into the center in order to be able to have a thesis and to be able to come up with a case that was, you know, obviously going to be successful, you know, in the court. Is that a good way to look at it?

Yeah, it's a good way to look at it. What we did is we assembled a lot of individual acts and episodes of criminal behavior and found unifying threads And then we were able to get a couple of witnesses who explained at an enterprise level the way La Cosa Nostra worked. These were people who had been convicted and they had turned state's evidence. So we were able to then fit the pieces together, but also explain why they fit in a certain way based upon the experience the witnesses had being part of La Cosa Nostra.

Wow.

It's amazing because I keep thinking about, you know, an NCIS or those where they have the boards and they have all the strings that tie tie together. And obviously, that's a world that you lived in and actually executed on in order to be able to prosecute those cases. And to think about how that ties into the war against terrorism, you know, it's a really amazing process of seeing what's not always there by just pulling the threads together, if you will.

Well, Mr. Secretary, you were only the second individual to serve as Secretary of Homeland Security after the department was formed following the attacks on September 11th. And Chad, you were Chief of Staff, so welcome to the conversation now. Can you, can you take us back, maybe Mr. Secretary first, on what that was like being in a relatively new government agency at such a pivotal point in time? You know, pressure was very high. Really, you have the whole eyeballs of the world looking at you. and you have a path forward that's very unclear, still a lot of unknowns, probably more unknowns than knowns. What was that like?

Well, let me step back and give you some background, which is important to understand. Um, so in 2001, in the spring or the actually kind of early summer, I was confirmed as the head of the criminal division at the U.S. Department of Justice. In those days, there was no Homeland Security. If there was a terrorist attack, it would be the responsibility of the Department of Justice to respond, in particular the criminal agencies. So on September 11th, I was driving into my office. I had the car phone on and my deputy was on the phone and said, you know, a plane just hit the World Trade Center. And like a lot of people, I assumed some small plane got turned around and hit the tower. But as I continued to drive and speak to him, he said a second plane hit, watching the news, a second plane hit the World Trade Center. And I said, this is not an accident. So we met in the Department of Justice and walked over to the command center at the FBI, which was the operational hub of any response to terrorism. And there I met an old friend, the now late Robert Mueller, who had just become FBI director within a couple of weeks before. And as we began to be briefed, I had heard about the plane that hit the Pentagon, and we heard about the plane that was taken down before it could hit a target. We didn't know for a while how that happened, and then we learned eventually it was the passengers who took control of the plane and crashed it. But basically, during that 24 hours and the subsequent days and weeks, it was about building on the run a response capability to terrorism. And that meant being able to identify the terrorists, being able to harden those targets that were likely to be vulnerable, and beginning to start to think about what a response would be. So when I came into the Department of Homeland Security in 2005, I think the reason I was selected and, and the background that was most helpful was my having been literally on the front line leading the response to 9/11 during the weeks and months after that terrible event occurred.

Yeah, I believe it.

Chad, how about you?

What was your perspective? What was going on at the time?

Yeah, at the time for me, I actually happened to have, I had been in the CIA and I had left and was on Wall Street. And in the morning of 9/11, at Goldman Sachs, we were literally at 8:30, we'd started a call and at that time it was the largest raid defense in US history. It was a $58 billion raid defense for AT&T against Comcast who was rating them for cable assets. And the first plane hit shortly after the start of the call. And the rest is history. And it was one of those things that was just so profoundly moving. And for all of us in the country and I think for our generation, it was really our moment to consider stepping up and answering the call. So I ended up— I got outreach from my old friends in the agency as well as others. And I didn't go in right away. I had to think about it, but I did decide to leave ultimately Wall Street to answer that call and was privileged to be able to join the Secretary in the largest reorganization of the US government since the formation of the Department of Defense, which interestingly was almost exactly 60 years before. So, if you think about it, the attacks of 9/11 happened in 2001. World War II, Pearl Harbor happened in 1941. So 60 years difference. One was a surprise attack. It killed almost 3,000 Americans. The other one was a surprise attack that killed almost 3,000 Americans. And if you look at it, you know, the government looked at it after the attack to learn lessons. And in both cases, there was a feeling, if you looked at the evidence, there was a failure to connect the dots. There was a failure to fuse data. And so, um, the agency that I had previously served in, the CIA— is it C and CIA? Is Central Intelligence Agency. It was created in the aftermath of that first horrific attack in Pearl Harbor to try to fuse and connect all the data within the US government to hopefully prevent any kind of attack that could have been prevented by not connecting the dots. And unfortunately, 60 years later, we saw that there was sclerotic buildup of siloing of information that wasn't being fully shared. So one of the key missions that the Secretary had as he stood up on the shoulders of Secretary Ridge as well, how do we create culture that basically promotes information sharing so that we never have another surprise attack like Pearl Harbor or 9/11?

I'm thinking about that vision that the secretary had and the way the department must have been operating. As chief of staff, it's largely your job to take that vision, take the decisions that are made by the leaders in government and execute on them, operationalize them. So maybe walk us through, you know, once you guys were in the seat in 2006, once you're, once you're established, what were the main initiatives and how did you think about taking that vision and putting it into practice namely the way you describe that sclerotic, you know, that regimentation maybe that wasn't facilitating all that information. How did you, how did you break that up, that scar tissue?

Well, I'll begin. Some of it was changing the rules of the road and the laws. You know, part of the reason there had been fragmentation prior to 9/11 was because, for example, there was a rigid separation between the intelligence gathering function of the government and the law enforcement function. And just to give you an example of this, the day after 9/11, somebody told me when I was at the Department of Justice, I better go read a report that had come in some months before from an agent who was part of the intelligence apparatus at the FBI. And the agent had written in saying, I've identified someone we need to interview as a law enforcement matter. he's come here from France, doesn't really speak English. He's taking flying lessons in Oklahoma, but he didn't stay around to show how to land the plane. And that makes me wonder what he really came here for. And I hope we don't have someone who's going to try to blow up the World Trade Center. Now, this had been written weeks before this actually happened. But because of the rigidity of the separation between intelligence and law enforcement, nobody acted on it. And that was a great object lesson in the importance of connecting the dots and not allowing the process to become an impedance as opposed to an assistance.

When you think about situations like that, and obviously every situation's different, but you're dealing with less information, not a complete full picture. And going back to the spiderweb analogy of trying to be able to pull all these threads together into a hypothesis or a thesis, as you were dealing with the reorganization and getting, you know, agencies to basically talk to each other, etc., you know, how did you navigate that and get them to be able to say, look, we need all of the pieces of the spiderweb to come together? I mean, was that through just, you know, mandating it? Was it through just, you know, specific— you mentioned law changes and rule changes, that kind of thing. But how did you change that culture to be able to do that, other than just the nobody wanting it to happen again, so to speak?

Well, we did have the benefit of having the wind at our back in the sense that people remembered what had happened. And so rhetorically, uh, nobody objected to the fact that we needed to connect the dots up. But you do, you know, run into a tendency of people to hoard their information. And so we had to build processes where we were regularly in contact with each other and where, for example, the senior leadership like myself or Chad or people at the top of the department pyramid were constantly interacting with the various unit chiefs of the actual operational elements to make sure they were coming together and responding to questions. Chad, you were very much involved in this. Yeah.

Yeah. I think if we look at that moment, I feel like that what the Secretary did in trying to make these decisions is bring together not only information from all parts of the government, but also from our state and local partners. Because when you're protecting the homeland, It's a, it's a whole of government effort and it's a state and local effort. So how do we do that? And he initiated what's called the, the NOC, the National Operations Center, which was a fusion and actually brought into DHS liaison officers from major, major city police, fire, EMS. Um, and it also connected the dots with what are called the, the Joint Terrorism Task Forces. They're JTTFs with within the FBI. And what I loved about having the Secretary as our leader at that time is he came from DOJ. And as you guys know, sometimes there's friction. I was in the CIA. You know, the only people that we didn't like more than the KGB was the FBI. I mean, there was just a legitimate inter-rivalry between these, you know, agencies in the government. It's a natural thing that can happen. And because the Secretary had the DNA from DOJ, he had credibility with DOJ, and we were able to get the FBI to not only collaborate, but the Secretary also would at times push back when our own antibodies would try to duplicate things that the Bureau was doing. So, for example, there was, you know, there was a system to gather suspicious activity reporting, SARS. The DHS was trying to create a separate system from the FBI system, and the Secretary squashed that and said, no, we're not doing that. They've already got it going. We're not going to reinvent the wheel and we're not going to get siloed again. And I loved that because it was both as a taxpayer and I loved it. And I also loved it from a former intelligence officer perspective. It's just, it made sense. It was operationally efficient. And all of that came together in the NOC. And at the end of the day, the hardest thing for me as his chief though was, you know, we were handling not only manmade threats like terrorism, but natural disasters, you know, like hurricanes, fires, floods. So at any point in the day, back in the day when we had pagers, I would get paged in the middle of the night by the NOC, the National Operations Center, and we'd have to make a call whether to, you know, wake up the secretary or not. And that meant we had to create thresholds for what constituted different categories of crises. And at the end of the day, even after doing that, you learn very quickly there's no such thing as perfect information. You're going to have the fog of war no matter what. And sometimes things that look small at the beginning end up becoming much bigger later. So it really is a challenge. But I can say today, you know, if you look back pre-9/11, I'm a— I came from where you guys are in Texas. I grew up in Beaumont playing football. Literally before 9/11, it was like having a football team with no quarterback. Everybody was running their own play. There were 23 different agencies, and our adversaries were taking advantage of that. They were exploiting the seams that came from independent agencies running independent plays. Today, after 9/11, it's not perfect, but I think what the Secretary and President Bush did in really creating that foundation of information sharing and fusing everything from the local, state, and federal level has really made the United States a much tougher target for our adversaries.

Well, and that's— it's great to hear that, and obviously we really we appreciate both of your efforts to be able to do it. I mean, it's mind-boggling for people sometimes to think about how it's now been over literally 25 years since we had 9/11 and there has not been a major, you know, situation on American soil of that magnitude. A lot of it is because of the work that y'all have done, and you should be very proud of that, and we're very grateful for that.

You know, can I just make— please, can I provide just one data point to prove that point? You know, when I was in CIA, it was always hard to say, you know, is it working? And every day that we didn't have nuclear war with the Soviets was a good day, right? But it's also hard to prove a negative. How do you prove that you contributed to that, right? So one of the things you have to look at is, well, what's going on outside the United States? And I'm proud to tell you that because of the efforts of President Bush, Secretary Chertoff, and frankly, it was a rare moment that we don't see here in Washington very often. It was a bipartisan effort on the Hill with Congress on both the Democrats and Republicans coming together in a united way. And as a result of that, literally, if you look at the data from the National Counterterrorism Center, all around the world, there were over 20,000 horrific deaths of innocent men, women, and children. And they weren't just in remote cities like Jakarta or Bombay. They were also in London, Berlin, Madrid. And that tells you, if you look at the data, not one of those 20,000 deaths and casualties occurred inside the United States from the time that we left office. So I can say with fairly high confidence that it's not perfect, but I do think there's no doubt that the collective effort of both Democrats, Republicans, state officials, federal officials, the country coming together, and actually average citizens tipping us off when they saw things that looked suspicious. We are a safer country today as a result of that.

No doubt.

And another thing I think that was helpful was, again, our relations with our allies overseas were very, very important in having unified approach to detect and respond to terrorism. We wound up having regular meetings with myself, you know, the head of the British intelligence, European intelligence agencies, and interior ministries, homeland security ministries. And the idea was to exchange information and operate in a coordinated way. But I will say we did have a few close calls. It wasn't just that after 9/11 everything stopped. We had to be on our toes. And there were a couple of times we had to respond quickly in order to stop something.

Well, I'm actually kind of interested about that.

I am very. Now you get right there. What can you say?

So, yeah.

What can you share?

What? Like, I think those near misses are— I think there's great stories behind that. So share. Give us a little bit.

So this is public now. I mean, it's been public for a while. In the summer of 2006, I got a call from actually my counterpart in the United Kingdom, John Reid. Who was the Home Secretary, who said the British were uncovering a plot in London by people who were affiliated with Al Qaeda to blow up between 10 and 12 airliners leaving from Heathrow Airport headed to North America. And had that plot been carried out, it would have been comparable to a 9/11 in magnitude. And what the plotters were going to do was take sports bottles of liquid and put a hypodermic needle in, drain the liquid, and then inject it with something that would be an explosive liquid that could then be detonated on airplanes. And they would bring these bottles in, get on airplanes, and then blow the planes up. Now, we had to work very closely with the British because under their legal system, they needed to have certain specific kinds of proof to arrest the perpetrators. So we had to basically be able to be trusted by the British to keep the secrets until they could get to the point that they could do the arrests. We, on the other hand, had to begin to immediately elevate our security because if they didn't manage to arrest everybody, we had to be able to make sure they weren't able to blow up an airplane. So that required us to balance both the need to maintain secrecy, but also the need to have enough people read into what was going on to develop countermeasures in order to prevent someone from executing the plot. Eventually, what happened after a few weeks is the Pakistanis arrested one of the plotters in Pakistan. At that point, the British and we understood it was no longer going to be a secret and they might pull the trigger on these bombings immediately. So we began the process of arresting them and then shutting down air traffic for a day. And the challenge then became, what do we do now with respect to this new weapon?

Yeah.

Are we going to never let people bring any liquids on airplanes? And this is a question of risk management. How do you decide how to manage the risk so that you avoid any real risk of a disastrous occurrence, but at the same time, you don't make life impossible on a day-to-day basis for citizens. And so what we wound up doing is experimenting with different kinds of liquid explosives to see what is the amount below which it's probably not gonna be able to do any real damage to a plane. And the amount above which it's too risky and we have to prevent people from taking it on.

I have a guess.

Carry on.

I have a guess at the number.

Yes.

3.4 ounces.

Right. We did a bunch of experiments blowing things up to get to that point, and it's turned out to be, to be the right thing. But there's a larger lesson here, which is risk elimination is usually not a possibility. and it becomes too onerous and you wind up to use an expression, throwing the baby out with the bathwater.

Mm-hmm.

So what you gotta find is a level of risk that you think is reasonably acceptable, although not perfect, but doesn't so impede ordinary existence that it makes people miserable and it actually really winds up damaging the economy in our, our society. A good example of where this came up quite a bit was in COVID. When again, there had to be a balance between preventing people from, you know, being in situations where they might be communicable disease holders, but at the same time, not locking everybody down indefinitely so nobody could go to work and kids could never go to school for years. So you had to balance and manage the risk.

I feel like we could stop right there. I mean, that, that, that is like, that is so well stated. I, I was thinking as you were talking, I was thinking like, this applies to obviously what we do in our business, and we talk about the downside a lot of what we do, but I was thinking really more as a father of children. I've got 4 young children, and thinking about like the world that they're growing up in, and, and, and what are the— like, I—

you don't want to—

you can't eliminate the risks of things happening to them. It's not possible. But, but you want to be— you want to think about what are you exposing them to? And as we like to say, if you can live with the downside, then the upside takes care of itself. Okay. So let's fast forward now. You guys, you guys spent time in government, 2006, I think, to 2009, 2010 timeframe. Obviously, administration changes, you see different leadership come in, etc. You guys decide to start the Chertoff Group, right? And so, and you've been, you've been running it ever since to today. Talk to us about what you do with the Chertoff Group, why you formed it. A little bit of the history behind the firm that'll take us to really current events, which there's no shortage of things to get into here.

Chad?

Yeah, the secretary was highly sought after at the end of the Bush administration. He could have gone to any law firm that he wanted for very lucrative, stable pay. And instead, he, like me, I could have gone back to Wall Street. We both felt a passion for security and we wanted to find a way to build a business around that. And I think we both stepped back and said, you know, just like hopefully most good entrepreneurs, what's missing in the market today around that passion? And I, I, one of the things we kind of sat down and did on the back of a napkin to plan it out was this concept of we wanted to be single sector focused, just do one thing and try to do it really, really well. Second was we wanted to basically build full lifecycle services around that sector focus. And we did it with a vision of taking what we felt was missing. And I, I told him about my experience on, at Goldman on Wall Street where I was in the telecom, media, and tech group. And there were oftentimes we had seen companies that we knew were gonna be significant leaders and disruptors. but they were too small for Goldman fees. And so we basically stepped back and we had to let our, our competitors develop a relationship with them early. And then we'd have to fight to get back in later. And I thought to myself, wouldn't it be great if we had some sort of affiliated relationship with a consulting firm where we could basically show them and support them in their organic growth phase and then be there in a pole position to win a mandate either for inorganic buy side or possibly ultimately the exit on the sell side through a merger or an IPO. And Goldman flirted with that idea at one time, but it never came to fruition because ultimately the partners at Goldman felt that you just couldn't combine the culture and the economic model of a consulting firm with an investment bank. And if you wanted to blend in private equity investing, which we we knew we wanted to have both world-class consulting advice for organic growth in our sector. We wanted to have inorganic advice for acquisitions, and then we wanted to have growth capital available if a company needed it as well. And at the end of the day, we were told by a lot of my friends on Wall Street, like, Goldman couldn't do it and you can't do it either. And I know you guys sit in Houston, where MD Anderson tries to put an end to cancer. And one of their mottos is, those who say something is impossible should get out of the way of those who are doing it. And I feel like the sector and I, when someone tells us you can't do a vision that you have, it just makes us want to do it more. And so I'm proud to say that here we sit today here in Washington, a decade and a half later, having survived, you know, a global pandemic, multiple wars, multiple government shutdowns, the great financial crisis of 2009. And we're not just surviving, we're thriving. And so I do think the vision that we had, it wasn't an easy road. And as the Secretary knows, just like anything, a lot of the plans that we wrote down on paper had to give way to realities of the market. Because like Mike Tyson said, everybody's got a plan until you get punched in the face. And so we had to adjust when we got punched in the face a few times. But I, I do think the secretary has been a great partner because we both try to put our, our pride and our egos aside when we have to, to listen to the signal of the market. And that's— I think that's why our platform, it's very unique, but has thrived and survived through all this, this decade and a half of ups and downs.

Well, one of the things that's really fascinating about that is there's a lot of very interesting lines of discussion we could go on. But I'd, I'd like to first talk about how, you know, Mr. Secretary, you obviously saw all of this inside of government and the challenges that were within the government that were unique to government. But then you also recognized that there was a need in the private sector in collaboration and in the world of defense and security. So was there a moment in time that you saw like there's, okay, here's a gap, we need to fill that gap. I mean, ultimately business is just find a need, fill a need, and then get paid for doing that. That's really what obviously every business is doing. Was there a moment that led you to say, now's the time and this is the way to do it?

Well, I don't know that there was a specific moment. I mean, obviously, and when my term ran out in government because we had a changeover of presidents, I wanted to continue to be involved and engaged with our national security because I realized this problem was not going away. And You know, if you're in a war, you feel a real commitment to the people you fought with and to what you were protecting. And so we wanted to continue that. And we recognized also that the private sector was not going to be a bystander anymore, that they were going to need to have security and resilience policies and programs, because although the government could do a very good job in frustrating plots and attempting to round up terrorists, they're not going to be perfect. And that means you've got to do a certain amount of self-help. And part of that was also establishing relationships with government agencies to get the benefit of their intelligence and their advice, again, to raise the, the, the walls that you have to surround and protect your people and your business.

I'm, I'm interested to sort of get into the, the events of today, and, and you guys obviously are serving a number of different clients and a number of different faculties. I feel like, Chad, Every time I email you now, I get the response of limited access to email, which means Chad's off somewhere in the world doing God knows what. There's so much instability in the world. And this is kind of an open-ended question, so I'll let you guys take it wherever you want. Where do you think the most pressing matters are for Americans to be thinking about and for investors to be thinking about? As it relates to like current geopolitical events? You've got obviously what happened down in Venezuela. You've got everything with Iran. There's the China question. There's the Russia question. You know, I mean, this is why I say we could go forever and ever here. So, you know, I'd be curious for, for what's top of mind for you guys and what's top of mind for the types of clients you're serving. What are they asking you?

Well, I think, you know, I'll begin then, Chad, you can come in as well. I think that what is important to remember where we face today is that the domains of conflict have expanded and merged. I remember years ago when we first got started doing security, people tend to look in a very siloed way at what the national security mission was. There was kinetic activity like the Army and the Navy and the Air Force. There were scientific or technological issues, like for example, with biological warfare. After we were in office for a while, cybersecurity became more urgent as we began to see cyberattacks as a vector that could be used to undermine both government and private business. But I think what's happened even more recently is a recognition when you look at issues like supply chain, that everything, whether it be economic security, whether it be health, All these things really are part of national security. And where there is a risk to one element of that, that risk may spill over onto other things. So now, more than anything else, I think you need to have a strategic, holistic focus at what your vulnerabilities are, what your downsides are if your vulnerabilities are exploited, and what are the tools and capabilities you need to bring to cover all the different domains that are functioning together as areas of conflict. And we see that now with supply chain issues. We see it now with the Straits of Hormuz, some of the issues in Latin America. All of these are issues that are not just limited to whether you're moving tanks or battleships, but have to do with moving economics, Moving health, moving even culture. All these things become an issue. And as we develop new technologies, like, for example, with artificial intelligence, that is also going to be an area of security concern that we're going to need to consider when we look at a holistic strategic view of our national security.

Okay. Now it's a podcast. We're talking about AI.

Yeah. And I'll just, I'll just build on what the Secretary said, Mark, because I think I think what the Secretary is underscoring is, unfortunately, you just look around the world and you can see that the post-World War II order is now crumbling. And it's just the reality that the peace dividend that we've all enjoyed for many decades is now no longer there. And I think the spike that we're seeing in security spending is now not a short-term blip. This is a structural rewiring of the global risk architecture.

It's—

think of it like a global operating system. And what the Secretary is talking about is like making the global operating system today is shifting from largely on the back of a hegemon, the United States, with some of its allies, to now it's going to a multipolar world. And it's a world where we haven't seen this level of security spending both in the commercial and the government space ever. It reached a record $2.7 trillion in 2025. It's growing double the rate that it did 20 years ago. If you look at that spend, I want you to think about this. Everyone is enamored with the AI and data center trade. Theme. But think about it, that if you aggregated the entire CapEx of every single hyperscaler, it's going to be about $600 billion. Now, that's a huge number, let's be honest, but we're talking about $2.7 trillion. So over 4 times the AI opportunity. I can make a very strong case if you're managing a portfolio, let's be— I think there's going to be enormous wealth creation in AI, but there's also going to be a lot of losers and a lot of folks that get destroyed. We know with a single tweet about Deepseek, we saw a 20% drop in one day in the valuations of AI stocks. So, one is a highly speculative, volatile, unproven yet model on ROI. The other is a sector that's anchored at a starting point of 4x the AI buildout And it's non-discretionary. It's a proven business model where the customers must buy both on the corporate side and on the military side and the government side. Why? Because the alternative is extinction. So, if you think about—

Maybe a follow-up question to that just while we're talking about some of these numbers, you got me thinking about it. I've mentioned this in the past in this podcast. My whole family is military. My dad was an infantry officer for 30 years and I have 2 active duty brothers today. I've followed this for a long time. I've seen this spending dynamic. You know, my dad, you know, actually his office was destroyed on September 11th in the Pentagon. Thank God he was out that day. But, I mean, where, where is this spending going up? You're talking about this growth and like it's unprecedented levels. So we've, we've been spending a lot of money in government on defense for a lot of reasons that make a lot of sense for history. Purposes. But, but there's a whole new world that's, that's developing here when it comes to like defense contracting and the types of companies that have started. So like maybe shed some light on where these new dollars are going, where they maybe haven't gone in the past. What's different today versus where it was maybe, you know, it's not necessarily 12 months ago because a lot of this actually started probably back in 2021, 2022.

Yeah, if you look at— so starting with the Ukraine conflict, which is the first major land war since World War II, think of it as a 4-layer cake. Like, you've got the traditional defense prime spending, which are predominantly on conventional weapons systems. And what's unique about— that's not unique in terms of what it's doing, but it's the scale and magnitude.

Why?

Because Europe has woken up to the reality that they have a real threat on their doorstep with Russia. And they, they have to be prepared to also defend themselves. So what does that mean? It means literally the world's third largest economy, Germany, has not only agreed to meet its 2% GDP spending goal, but it's agreed to go higher at 5% and has over— Germany alone has a $100 billion modern military modernization fund. Why? Because Europe realizes that they've neglected their defense industrial base for multiple decades. So that's the first layer of the cake. Is this, the primes in the conventional spending. We've seen the same thing in Japan is doubling the size of its defense budget. Australia just signed a multibillion-dollar UK-Australia pact together to build out their nuclear sub fleet. So we were seeing synchronized spending around the globe on this issue of the conventional buildout. The second is, if you look at the layer of what we call high-tech innovators, so think of some of the companies that are in— I know you guys like this theme and you've done a great job of helping your clients to access it. And you've got some exposure to companies like Anduril, companies like Saronic. These are what I'll call the next-gen tech players, and they've come in with very effective, exciting, disruptive systems that embrace both AI and autonomy. And if you want to, we can kind of talk about some of those. But Saronic, for example, is an underwater unmanned vehicle system which right now we desperately need in the scenario that we look at in the case of the Straits of Hormuz. It would have been nice, frankly, if the US military had embraced Saronic. We have a company called Thermahan that is complementary to Saronic to be able to handle the mine countermeasure mission. Unfortunately, the Navy, to be candid, was a little slow in embracing that the same way the Air Force was slow in embracing UAVs. But one of the maybe silver linings of the conflict in Iran and what we're witnessing in Ukraine is some of our military is waking up to the realities that you need to— you can't just put all your chips in the conventional weapon basket. You've got to be ready to diversify and embrace innovation, even if it's uncomfortable, even if it means the way that you've traditionally operated and how you got promoted is going to need to change. So that's the second layer of the cake, or these new disruptive, innovative neotech companies. The third are what I'll call the picks and shovels, meaning the providers of that. So if you think about right now, we're using up a lot of the consumables, both traditional ammunition and things like the missiles that you see intercepting in Iran or in Israel over the Iron Dome, etc. That's all consumable-type munitions. The folks that make that need to have replenishment. So there's going to be a lot of just basic replenishment of artillery and munitions. And then the third is the— we'll call the other picks and shovels, which are— think of the new things that are supporting these advanced weapons systems. Some of it's the materials, so the advanced composites that are needed for hypersonic missiles or space. And it's also things for stealth systems. In addition, you've got the whole backbone of all of this is becoming software-defined. So today it's less about the steel and it's more about the software. Those are the brains behind the steel that's being applied in the theater as kinetic kill techniques. And these are the software providers, the tech element of that is another really exciting piece of this. Private equity, and I know that's a big focus of CAS, it's uniquely suited for this because this is going to be a longer-term transition and it's not really well suited for public capital because it's not going to be something that just is easy to do quarter by quarter. It's going to be much more of a multi-decade transition, which is also why it's such an exciting non-cyclical opportunity for investors because it's going to be, as we said, the demand is up and to the right and it's done in a non-cyclical way. It's not just in the military side though, Mark, it's also on the commercial side. If you look at cyberattack costs are estimated to be this year around $10.5 to $10.7 trillion. Oh my God. If that were a country, it would be the third largest GDP in the world. And it's not subject to recession. It is basically those types of costs are having to be protected against on the commercial side. So a lot of the technologies in this space and that four-layer cake are dual-use technologies that can be applied not only for military use cases, but also for commercial cases. And that's what we like to focus on too. We call it the digital Janus or the two-faced approach where you're trying to meet the zero tolerance, zero risk requirement of a general who cannot fail in his mission. And you want to meet the requirement of the Fortune CEO who needs security at scale. So it's a really exciting sector to be in.

Well, one of the most interesting things about it is, you know, you laid out an amazing case as to why, you know, it's 4 times bigger than the hyperscaler spend. It's obviously something that people don't really have a choice of whether or not they do or they don't. It's, you know, for their ultimate survival to be able to do it. But the other thing that I think people don't fully appreciate is that there's just not that many companies that are allowed to participate in the ecosystem because not everybody is allowed to do business with a government, whether it be in the United States or in Europe or one of our allies. And there's obviously all the security clearances that they have to go through. And then also, not everybody's allowed to invest in those private companies. There's very specific criteria that somebody has to meet if they're going to be enabled to invest in those relationships, in those businesses that have the relationships to be able to do business with the government. And all of that is without question coming front and center because what is happening in, you know, in Iran. Obviously, there's been so many headlines the last couple of weeks about you know, running out of Tomahawk missiles and obviously, you know, shooting down a $30,000 drone with a $3 million missile, that, that math does not work. And so this technological change combined with the need for the revamping after decades of underspending, it is just a tailwind that's as strong as I've seen in my 35-year career. But it's also confined to very few participants, which is why, you know, groups like yours and others that have connectivity to those relationships is such an important part of maximizing the opportunity to provide the capital to what people need. And I'm going to, I'm going to shift to that and say, you know, in this concept, we talk about technology, we talk about AI, we talk about autonomous, but at the core of it all is still people. So when y'all are evaluating people that you want to invest in, people that you want to work with. You know, what is it that really separates those that are, those that are going to win from those that you have less confidence in? Doesn't mean they're not going to win, but what is it that you look for that is that X factor, if you will, that gives you confidence?

Well, I'll start, and, Secretary, please chime in. When we look at companies, you know, we're big fans. I went to Columbia University for a reason because that's where Warren Buffett studied under Benjamin Graham. And one of the things that Buffett loves to teach, you know, rule number 1 is don't lose money, which I know you guys at KAS fundamentally embrace. Rule number 2 is go back and refer to rule number 1. And number 3 is make sure you invest only in something you understand and in people you trust that have integrity. And I think you start with integrity. I think the reality is We have had situations in the government space of corruption. We've had situations of dishonest entrepreneurs. And so, that's the first level test. And thankfully, because it's a small community like you said, you can find out very quickly who's got a great reputation and who doesn't. The second though is if, let's say they're a newcomer, what we will look at too is behavior. So, The same person that tries to skimp on— we literally will look at the spend of how much are they focusing on their own cybersecurity if they're trying to provide a solution to the US government, for example. If they talk a big game on providing only their solution to the government and they're not minding their own house in their own security posture, to us that signals, A, they don't— they're not practicing what they preach, and then B, it does show that they're shortcoming, they're basically trying to take shortcuts on their spend that are going to create outsized risk for us as an investor. And so again, don't just take them at their word, look at their behavior. That's an old CIA technique, and I think it applies to everybody that we do business with. And then the final part would be making sure that they embrace the Janus concept of the dual use case, meaning that they can't just be enamored with only one use case. They have to be prepared to make sure that the solution is useful in the commercial context as well as in the government mission. And why? Look at what's just happened with TSA, right? Where we have government shutdowns, we have partial shutdowns. And if you are solely reliant on— if you were somebody providing a solution to TSA, you would be in pain right now. But if you had a dual-use capability like many of the companies that are in your portfolio and in ours, you can ride through those troughs when they happen. And it's still worth being in the government space because once you get through these hiccups, you can't have a better counterparty credit risk than the US government. And you get, like you said, they're very sticky contracts. It's hard to be part of that club. And the beta on those cash flows ultimately ends up being lower over time with way more visibility, multi-year contracts that you just don't get in the commercial space. So that, that blended approach and commitment to the Janus two-face dual-use approach is something that we need to see in the entrepreneur before we're going to pull the trigger and invest.

So, Secretary, I'd love, I'd love for you to add to that, but I want to make sure that we come back and talk about the commercial aspect, because I think a lot of people don't connect the dots there. But, Secretary, you have obviously a very unique perspective as a former prosecutor and as obviously somebody who's worked with a whole lot of folks. So how do you help evaluate and what do you look for?

Well, I, first of all, I mean, I agree with what Chad said about the importance of integrity and making sure we don't have people who are going to cut corners. And that's particularly important when you're dealing with the government. I would say, though, in general, I feel it's important that the management and the leadership of an enterprise have a commitment to provide value to stakeholders. Now, that's not just shareholders. That means employees. That means customers. So I feel strongly on the boards I sit and I articulate this viewpoint that it's not enough to simply hit targets in terms of revenue or in terms of, you know, other kinds of business measures. You also have to make sure you're investing in your employees and motivating them and that you're providing real value for your customers. Because in the long run, that's what's gonna sustain and build a business as opposed to a kind of come in quick, grab whatever you can, and then dump everything else. So I, I, that to me, that, that investment in stakeholders is an important part of my mattering map when it comes to investing.

I, I have a question given your guys' long history in this security space about the people. We're talking about leadership, we're talking about people, we're talking about culture. You guys have been active participants here for 25 years in various seats looking at what's going on. How has the tenor, the quality, the character of the entrepreneurs in the defense area, security area, evolved over that time period. I hear a lot today about this resurgence that's happened in Silicon Valley of a remnant, so to speak, of folks who said, look, we're going to take this patriotic view that you described, Secretary, of saying, hey, you spent from what, 2001 to 2009 fighting this war. You're like, I'm not done. The war's not over. Like, what else could I go do? It's interesting to sort of hear that now coming out of the Silicon Valley you know, companies of the world. What are you guys seeing? What are these people like? What's the conversation for you all?

You know, I think during the '90s, in the first part of, you know, well, during the '90s until 2001, I think there was the kind of end of history view. And, you know, war is over, Soviet Union is dissolved, the U.S. is triumphant. We don't need to really worry that much about defense anymore. And then we went into the post-9/11 situation, and then that did get a focus on certain kinds of technologies that particularly would be used for surveillance, for intelligence collection, for intelligence analysis. And I think that did attract entrepreneurs to getting into that area, partly because they were motivated by patriotism and partly because it looked like an opportunity. But more recently, I think what has surprised people is the way in which the old-fashioned concerns about being able to fight back against your adversaries have come back in full flower. And we've got adversaries all around the world now, and we may have to fight multiple adversaries at the same time. And that puts a premium on certain kinds of technologies that had not been of great interest, I think, before. So I think that to me is one of the major changes I've seen over the last several years.

I'll just add to that, that we've seen this cycle where it's what I'll call— it's been a love-hate relationship with Silicon Valley and Washington. And if you look at it, Silicon Valley— and I say this with all due respect— a lot of the major innovations that they will claim could not have happened had it not been for the government's support. I'll give you a few quick examples. Number one, the whole backbone of the entire AI revolution is on the back of the semiconductor. The semiconductor never would have flourished and become an industry had it not been for the Department of Defense's investment in the Minuteman missile with Fairchild Semiconductor. And you look at the map of all the Fairchild Semiconductor alumni, that they were the— they spread all over the valley and they're the ones that flourished and became Intel, et cetera, and NVIDIA, et cetera. So, you look at— then just take the example of the internet. You know, despite what Al Gore says, it was actually DARPA that invented the internet, which then, again, dual use. It was meant to be how we would remain able to communicate in a resilient— if we had a nuclear attack, how we could actually have a communication system that could withstand that. And then it became this amazing source of incredible commercial wealth creation. Then you look at, I love my Tesla and I love putting it in automatic drive mode. I know my relatives in Texas who have precision agro-farming with their John Deere tractors that they put also in automatic drive mode. None of that could have happened if the United States military hadn't invested in precision-guided munitions using geopolitical geopositioning satellites, GPS. So, over and over again, it's actually been a synergistic relationship that's been massively, not only wealth creation and incredibly profitable, but it's actually created really important use cases for the world that have been incredibly helpful for the good of mankind. And so, when Silicon Valley and Washington work together, great things can happen. But we see it, there was one period on Project Maven when some of the employees at Google boycotted and then there became tension between Silicon Valley. I'm seeing, and the sector is seeing, Mark, what you described, which is a renaissance. We're seeing now an openness where Silicon Valley entrepreneurs want to take their solutions and be part of a higher purpose and wanting to defend not only the United States, but the world. And, and we are seeing that where there's a great guy and maybe you could have him on your show at one point. His name is Arun Gupta. He's a partner from Carlyle and Columbia Capital Partners who then took his wealth and created a philanthropy called Noble Reach. And we are working with him as well, where he's written two books, teaches at Stanford. One's called Venture Meets Capital— sorry, Venture Meets Purpose. And the second is called Mission Generation. And these are case studies on how he's basically helping, you know, the top talent out of Stanford and other business schools to think about spending a portion of their career, not their whole career, but going into government in rotations. And I think what I'm finding, we're in a dialogue with Sean Cairncross, who's the White House Cyber Czar, and other members of the government who want that talent, welcome that talent. But right now, the federal workforce arrangements are not user-friendly for that. So we're trying to embrace new concepts of how you can get rotations of this incredible private sector talent into government and then let them be able to go back out and use what they know the way the Israelis do with Unit 8200, some of the best cyber entrepreneurs in the world. They go in to serve in the Israeli military and they have a social contract understanding that they're not going to be prohibited from using the knowledge that they attained in their government service to then go and do exciting commercial cyber companies. We should be doing the same. We're not there yet, but I think through things like the Noble Reach Foundation, we'll get there. And those entrepreneurs all then are exciting because they want to come back and support the mission through the private sector.

When you think about the companies that you work with, etc., you know, we talk a lot about risk here. You've talked about a lot, a lot about risk during this conversation. What is it that many people are underestimating, that they're just not paying enough attention to, that they really should be, and that you would counsel them to be able to really be assertive, to take that by the horns, if you will, in order to be able to protect themselves?

And I would say geopolitical risk is perhaps still somewhat underestimated. And we see that now in terms of what's going on in the Middle East. But the ramifications of a breakdown of geopolitical order or geopolitical economic order can have real effect on performance of companies, both in terms of your ability to get critical supplies and what your market is looking for in terms of what benefits you're able to provide. So, I mean, you have to take a holistic look. It's not just a narrow question of the specifics of your business, but it's the entire background against which your business operates on a geopolitical basis.

The other thing I would say too that's underappreciated is, and we're, and we are seeing it now, is previously there was this misconception when these geopolitical events happen that the commercial side is a safety zone. And what we're seeing is the death of that misperception. If you look at what just happened for the first time in history of war, we've seen, we've seen in the past Iran try to use cyberattacks against our infrastructure, both financial and otherwise. But we've not seen them use kinetic, meaning actual physical weapons against targets. What they did this time was, you may have seen, is they targeted two specific or three specific AWS data centers, two of them in the UAE, one of them in Bahrain, because those were the data centers that were supplying the intelligence and other data analytics for the war effort. And it's rumored, and I don't know this for true, that there's the $1.7 billion Nimbus contract that supports the Israeli military is in one of those facilities. So they accomplished, they couldn't, the systems were very hardened on the cyber side. So they then went to the kinetic side. And hit them with missiles. You may have seen yesterday there was an announcement from the Iranian Revolutionary Guard Corps stating that any commercial enterprise that is assisting the Israelis or the United States government in targeting Iranian officials who've been assassinated will also now be targets starting to— they literally said April 1st at 8 a.m. their time. So as of this morning, and they listed out Hewlett-Packard, Cisco, Google, Palantir, etc. So and you may have seen even in London, the Bank of America building, a plot was foiled. It's linked to the Iranian, Iranian terrorists as well, where they're targeting anybody that they conceive as having supported in a direct or indirect way the war effort. So this death of the commercial safety zone misconception is a good thing. It means that they now— everyone now knows that you've got to— the US government and our allies will help to try to disrupt plots like the one in London against Bank of America if we find out about them, but they can't rely on the US government or our allies alone. They have to be prepared to also do their part in protecting their own enterprise and their own people. So I do think we're seeing now a greater appreciation of that among our client base. I think we've never seen a more openness to consider embracing new ways to manage this. And it's not something that can be eliminated. As the Secretary said, we're not one of those firms that says that you can never spend enough on security. We think you have to be thoughtful about it. You have to buy down risk in a very quantitative and thoughtful way. You can't eliminate it. But there's no question that those who make themselves a harder target than the next guy are going to be a lot safer than those who don't.

As we move towards closing, wrapping up our time, you both have had the opportunity to see lots of different types of risks in the world. And I would be interested in just hearing in summary, maybe start with you, Mr. Secretary, what has shaped you most in how you see risk and what's most important to you when you're evaluating risk and uncertainty out there in your own life?

You know, I think what I realize is you can't eliminate risk. And the understanding that in order to live a life which is gratifying, you've gotta be prepared to accept a certain amount of risk, but you've gotta be kind of cold-eyed about understanding what is acceptable and what is not acceptable. And some of that depends on our own personal concerns. And, you know, are we particularly focused on health? Are we focused on wanting to have the economic freedom to travel. But I think it's about not only a personal decision, but an understanding of the way the world works in the current risk environment.

Chad, I'll just add that, you know, the Secretary has really beat it into us, and we've made it part of our, uh, methodology when we advise clients, is to move away from this perimeter concept of security to actually resilience. And, uh, there's a great book some of your listeners may have read called Antifragile by the famous risk options trader Nassim Taleb. And he basically talks about this idea that, you know, we're in a world where you can actually create commercial competitive advantage for yourself and your company if you go from being somebody that's just reacting to threats around you to being proactive and assuming you're going to be disrupted, but then really practicing or rehearsing resilience. And so don't think of security as simply an expense that's constantly dragging you down. It can be actually flipped into an offensive differentiator in today's world. And I think the, the focus on resilience, what does that mean? The formula that we teach all of our clients, and everybody should know this formula just the same way you should, everyone needs to know the basic accounting formula of assets equals liabilities plus equity. The same is true in risk. Risk equals threat, T, times vulnerability, V, times consequence, C. And a lot of people spend a ton of time focusing on the T without thinking about the C, meaning they're wasting time on threats that don't have high consequence, and they're neglecting the threats that do. And so you can't protect— you try to protect everything, you'll protect nothing. You have to focus on the high-consequent risks And then the V, don't try to have a perimeter approach. Assume vulnerability and make sure when the, the eliminate the, minimize the V as much as you can, but be ready to be resilient when you are penetrated. That resiliency test is really what determines the winners from the losers, the ones that are truly antifragile and can turn it into an offensive advantage.

Well, it's amazing because, you know, I like to sometimes bring things down to something the audience will remember. What I will remember from this is 3.4 ounces. You have to bring down the risk level to a level that you can live with and ultimately that you feel like is not going to keep you literally locked in a closet with bubble wrap all over you. But you have to be willing to go out and take some risk. But you want to make sure you quantify that. And Chad, the formula you just gave, and obviously, Mr. Secretary, the comments that you've provided help give us a framework to be able to move forward. You know, Mark and I really want to thank you for joining us today for your insights. And for all of our audience, if you'd like to watch more episodes just like this, you can go to Tony Robbins' YouTube channel, you can go to Spotify, you can go to Apple, you can go anywhere the podcasts are played. And we'd love for you to participate in those other, in those other episodes. And we look forward to seeing each of you very soon. Thank you very much, gentlemen.