#264: Dan Primack on How Covid-19 will Impact the Early-Stage Investment Climate

Dan Primack is the business editor at Axios and author of the daily Axios Pro Rata newsletter and podcast, where he covers the world of dealmakers across VC, PE and M&A. In this conversation, Anthony and Dan discuss the current economic crisis, the approved stimulus package, how small businesses are affected, the current impact on private equity and venture capital companies, and what limited partners are saying. =============================== Crypto.com is the only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users currently using the Crypto.com app. Download and earn $50 USD using my code ‘pomp2020’, or use the link http://platinum.crypto.com/r/pomp2020 when you sign up for one of their metal cards today. =============================== Ledger hardware wallets empower you to optimally secure, own and control your crypto. Visit ledger.com and give yourself peace of mind by knowing that your cryptocurrencies are safe. ===============================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off.

• 0:11Anthony Pompliano?

  Dan Primack is the Business Editor at Axios and author of the daily Axios Pro Rata newsletter and podcast where he covers the world of dealmakers across VC, PE, and M&A. In this conversation, we discuss the current economic crisis, the approved stimulus package, how small businesses are affected, the current impact on private equity and venture capital companies, and what limited partners are saying. I really enjoyed this conversation with Dan and I learned a lot. Before we get into the episode, though, I want to quickly talk about our two sponsors. The first is Crypto.com. They're an all-in-one platform that allows you to buy, sell, store, earn, loan, and invest crypto all from one place.

• 0:52Anthony Pompliano?

  You can join over 1 million users to buy, sell, store, earn, loan, and invest crypto in their mobile app, Crypto.com app. You can download it and earn 50 US dollars with my code POMP2020 or use the link in the description. They've got mobile payments now available for their debit card in the United States. You can pay in a fast, easy, and secure way with Apple, Google, and Samsung Pay, and it will work with most of the devices used every day, and the card details are never shared on your device. So head on over to Crypto.com and check out what they're doing, or go download their app from any of the app stores, Crypto.com. Our next is Ledger. They've pre-recorded an ad that I think they did a pretty good job on. We added some music, so it's quite entertaining. But I'm going to play that ad now, and then we'll get into the episode with Dan. I hope you guys enjoy it.

• 1:38Speaker 01

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• 2:27Speaker 02

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 2:53Anthony Pompliano?

  All right, guys. Bang, bang. I have the one and only Dan Primack here, tons to go over. Thanks for jumping on and doing this.

• 3:00Speaker 03

  Thanks for having me.

• 3:02Anthony Pompliano?

  Let's start first just your background and kind of what you're doing at Axios now, and then we'll get into the fun stuff.

• 3:07Speaker 03

  Sure. I think my title at Axios is Business Editor, although it's probably a misnomer. That's kind of when I joined, they asked me what my title should be, and I made that up. It was like six of us at the time, so it's still there. Obviously, I, so I do a couple of things. I write a daily newsletter called the Pro Rata Newsletter, which you can get at signup. Axios.com, which covers venture capital and private equity and mergers, acquisitions, et cetera. I do a daily podcast, also the Pro Rata Podcast, which is a little bit more generalist, kind of the intersection of politics and tech business.

• 3:33Anthony Pompliano?

  Awesome.

• 3:33Speaker 03

  Those are the main things. Those are the main jobs.

• 3:35Anthony Pompliano?

  What, what'd you do before Axios?

• 3:37Speaker 03

  I was a fortune for about six-ish years, I want to say, both doing a newsletter there and also as a columnist in the magazine and then at Thomson Reuters before that, about a decade or so.

• 3:46Anthony Pompliano?

  Got it. And based out of Boston, right?

• 3:48Speaker 03

  Based out of Boston, about 20 miles west of Boston. We have trees, like.

• 3:52Anthony Pompliano?

  As we were talking before the podcast, I got a Yankees hat on, he's got a Celtics hat on, but nobody's doing shit, so it's all, all good. All right, let's dig into the stimulus. So basically, there's a financial crisis happening. There's tons of debate on how bad it is, but obviously big enough for the stimulus package to get approved and ultimately get kind of doled out here. Maybe just walk us through like what actually is in the stimulus, both for corporations and small businesses?

• 4:16Speaker 03

  Sure. So there's a ton in the stimulus, as you might imagine. It's a $2 trillion package. And just for some context, I think I'm speaking out of school here, a little TARP, which was the thing that came after the financial crisis in 09, at least the initial piece of TARP, was I think like $750 billion. So this is more than twice what that was. That took like a month, put together, it failed a few times in Congress. This took about a week. So and and we're already talking about another one. So just to give context for the scope. So there's a couple of main things here. The one most people have probably heard of is the checks that you, me, and everybody else in theory will get. These checks, they could be, you know, up to $1,200 per family or per person. Depends on on on your personal income, et cetera. But there's basically going to be checks that are mailed to every American taxpayer, even more if you have kids. There's that sitting in there. That's a big piece of this.

• 5:02Speaker 03

  There is kind of what they would call unemployment on steroids. So usually when you get unemployment insurance, if you lose your job, you get a percentage of what you were making before. This will get people much closer to par. In some cases, too par. In some cases, for very low income people, above par, what they were making before they got laid off. Then on the corporate side, there's a few things. There's some industry-specific bailouts, particularly for travel, hospitality, airlines, et cetera. There is a big corporate loan package, which has not been defined yet. We're kind of waiting for, we're still waiting for guidance from Treasury about what that's going to be. And then there's a thing I think we're mostly going to talk about today, which is the Small Business Loan Program, which is about $350 billion. They're called PPP loans, or Payroll Protection Program loans.

• 5:46Speaker 03

  And the basic idea is these are for companies that have fewer than 500 employees. Loans can be for up to $10 million, and they base it on a percentage of your payroll. And for what it's worth, you do the calculation on your payroll, but anyone who makes over $100,000, their first $100,000 is all that counts. So when you're doing the math, you know, if you have an employee that makes half a million bucks, as far as the government's concerned, they make $100,000 for that calculation. And again, and the point of this is to keep people on the payroll. The the proceeds are supposed to go towards, again, keeping employees on and also things like paying the rent, utilities, et cetera. They are technically forgivable loans, which means you don't necessarily have to pay them back. And they're getting issued through private banks.

• 6:29Speaker 03

  So what you you don't apply to the government for it, you apply to a bank for it, and then the bank is basically being backstopped by the federal government, originally Treasury and SBA, but as just announced today, it now looks like the Federal Reserve is going to be backstopped.

• 6:42Anthony Pompliano?

  Got it. And so let's first talk about kind of who's the intended target of this? Because I think that'll lead into the further discussion around venture capital and private equity companies. But my understanding is this is mainly like, most people would think of it as like a mainstream business with 500 employees or less. Is that accurate?

• 6:57Speaker 03

  I think that's who it's mainly aimed at. Again, I mean, this is why we'll get into it. The goal is to keep people employed. I mean, that's the main goal of this is keep people employed, which is why there is another kind of $500 billion set aside for larger companies, 500 people plus. But yeah, this is for 500 and under. So yeah, a lot of mom and pops, but 500 employees is a lot, right? There's no mom and pop with 450 people sitting at it. So it's a little wider range. But I think when you look at the averages that came out after the first or second day of the program, yeah, you weren't talking about those maximum $10 million loans very often. They were mostly smaller.

• 7:31Anthony Pompliano?

  Yeah. And then the process for getting the loans, I think, has kind of come under scrutiny, mainly because, again, to your point, this has been very rushed, both because it needs to be, but also just the way that it was put together. And right now, if I'm a small business owner, I go to a bank, I actually apply. On day one, at least, there were some banks who said, we're not going to participate for various reasons. There were some banks who said, we'll participate, but only for a certain subset of clients. And then some banks who said, anyone and everyone, come on in and we'll help you out. What's that look like and kind of what's driving?

• 8:04Speaker 03

  It's really, really messy. And in part because the program that was announced was going to start last Friday. Treasury Secretary Mnuchin said, starting Friday morning, this program's going to be open. Well, not every bank was ready to go on Friday morning. A lot of the, in part, and it wasn't just the banks. It's not because the banks weren't well organized. The guidance from Treasury didn't come out until Thursday night. So you're saying to banks, you're about to originate possibly tens of thousands of loans tomorrow. And at about 8:30 PM the night before, we'll give you what all the rules are. And by the way, remember, these banks, like you and me and so many others, most of their bankers are working from home also. So they've got the added difficulties. And just think of any time you've gotten a loan, business loan, a mortgage, a car loan, think of all the hoops and all the paperwork you've gone through. And now you're asking these banks to process thousands of these, you know, very, very quickly.

• 8:50Speaker 03

  Um, so it was complicated. Bank of America was a good example. So they they were kind of the first big bank to really come online with this on Friday morning. But they announced that you had to have two things. You had to have an existing business account with them. And then you had to either have also gotten a loan from them at some point, or had a corporate credit card with them. If you didn't satisfy both of those things, you were out of luck. Wells Fargo said you have to be an existing customer. And then two days later said you have to be an existing customer and have fewer than fifty employees. And what this ultimately did was if you were somebody who wanted a PPP loan, if you were legitimately a restaurant, hardware store, whatever, who legitimately deserved one, it almost started to feel like if you picked the wrong bank five years ago, when you opened your business,

• 9:33Speaker 03

  you were screwed. And what a random, you know, luck of the draw thing.

• 9:38Anthony Pompliano?

  Yeah, so I think a lot of people have heard this and like the conspiracy theorists immediately run to like, oh, the banks are screwing. That's right. I actually think it's probably more about risk management on the bank side. Any insight into like, why Bank of America says, hey, you have to have the business account plus a credit card or taken a loan before, which they started to, which they started to back off of a little bit when they got prison. Yeah, look, part of it, as you say, is risk management. Part of it is also processing, right? If you're an existing customer, whether it's B of A or Chase or anybody else, they technically do know more about you on day one, right? They they they they just do. They have got a lot of your records on hand. So they can process those quicker. And because there was going to be such a rush here, there there is a business argument to be made. If you're, if you know you're going to get flooded with these things, the thing you really don't want to do

• 10:20Anthony Pompliano?

  is start taking on new clients and have your existing clients left out, left out. You know, what, you know, they're your clients. You can't do that. Yeah. And so I guess let's just, you know, kind of assume that the processing component is going to get solved, right? The banks will get online, because some of this is also technical, like they got to set up a website, they got to take intake. How, where do you store that database? How do you make sure that it's secure? All that kind of stuff's got to get set up. But once we get past that, then this brings into question, okay, who's intended for and who also should be available? And this is where you and I sort of go back and forth on Twitter of Main Street business, small business, five hundred employees or less, pretty understandable. And I could show you five businesses and someone could pick those three matched, those two don't, right? That's pretty clear. But then you get into, well, what about venture businesses, right?

• 11:03Anthony Pompliano?

  So venture capital backed businesses that have five hundred employees or less, are those part of this? Private equity then stuff up and says, well, wait, hold on a second. Like, what about our companies? You kind of spread out from like that core demographic or target. Help me understand, like, where does that layer?

• 11:19Speaker 03

  From my, well, where it lays right now is complicated. So, private equity is, private equity backed companies, so long as when we think of private equity in this context, we're talking about private equity owned, right? So, the private equity firm controls the company, has 51% or more of the voting stocks, say. They're out of this, they're, they're, they're, they are out of luck, they know they're out of luck. The venture backed ones are more complicated. And again, we're talking about venture backed companies that, you know, you know, a firm A has 10%, firm B has 10%, something like that. The, the problem here is something called the affiliation. And what the affiliation rule says is, if, if I am, if you and I both run venture backed companies and we have the same VC firm, we might each only have 100 employees, but as far as the small business association is concerned, we're both controlled by a venture

• 12:04Speaker 03

  capital firm, how many employees do they indirectly have throughout their entire portfolio? So, suddenly, my 50 or 100 person business and yours, actually, as far as the government's concerned, might have 3,000 employees. And suddenly, we don't qualify, because we don't have 500 or less for this program. There has been a push, a bipartisan push by Nancy Pelosi, Ro Khanna on the left, Kevin McCarthy on the right, to change this, at least for venture backed startups. They, there were new rules that came out, I want to say on Friday night or Saturday night, that were supposed to address this. They didn't completely, because they didn't seem to understand how, basically how venture capital charter, stock, stock charters work. For example, the fact that the, somebody, and this is really in the weeds, but if I'm a Series B investor, I technically have veto rights, maybe over a dividend, or something like that.

• 12:50Speaker 03

  So, McCarthy's people told me last night that they are trying to get additional guidance so that venture backed startups of under 500 employees can qualify for these and can legitimately. And the, and, and what, and the problem, of course, is, it's the banks that would be the ones holding the ball. So, what they need to do, they need to say to the banks, don't worry about it. The affiliation rules don't count. Because if I'm a banker, I can't take a venture backed company today and give them a PPP loan, and then have the federal government come to me seven months later and say, actually, you shouldn't have given them that loan, it's not guaranteed anymore. The banks just can't do that, they shouldn't do that, it's too much risk. Particularly on a low interest rate.

• 13:25Anthony Pompliano?

  For sure. And then how does this fit in with the private equity folks? Like are the private equity owned businesses? Is there talk about them getting access to either this $350 billion of stimulus? Or maybe another package that comes for them? Or they kind of just out of luck?

• 13:39Speaker 03

  It's interesting. The ones that are 500 employees or more might be okay because there is this other, there's this other pot of money, this $500 billion, which by the way, it might be where Boeing and others get money from. But they're calling this a midsize lending package, which again, we don't have details on that. But it is the private equity backed companies that are smaller than 500. And it's interesting, when we think private equity, we think, you know, KKR and Blackstone and TPG, and these huge firms that buy brand name companies that we've all heard. But there is an enormous amount of private equity, particularly in the Midwest, that buys small manufacturing companies, small industrial companies, et cetera, maybe with like 40, 50 employees. Those companies are out of luck in terms of this.

• 14:19Anthony Pompliano?

  Yeah. And I guess this really is kind of the thought process here of this isn't a bailout, right? So you kind of kind of put bailouts on one side. These are loans you described earlier.

• 14:28Speaker 03

  Although forgivable, although forgivable loans, so.

• 14:31Anthony Pompliano?

  So that's what my question is going to be. Yeah. So my question was, it's going to be like, on what terms do I not have to pay it back versus I would have to pay it back if I get actually some of the stimulus?

• 14:41Speaker 03

  I think I don't want to speak and be too wrong on this. I think in general, so long as you meet the requirements in terms of maintenance of payroll. So I think it's like 90%. And again, don't look at this up. Don't trust me on this and then go apply for a loan. But I think if you maintain something like 90% of your employee base, then you, then it is considered forgivable. I think you have to be able to prove need, but it's interesting when you look at the application documents and not bank specific ones, the recommendation from Treasury and SBA, it's really, really vague what you have to say. It doesn't say you need this money to maintain operations, which would be, oh, okay, wait a minute to keep my 50 employees and then my what? No, it just says to support operations. Well, in theory,

• 15:23Speaker 03

  any money to any business supports operations. Give $10 million to Goldman Sachs. That will support operations. Of course it will. Now, do they need it? No. But would it support operations? So there's. Pretty big question. You know, that word support is doing a lot of work in that application. And I think from a technical perspective, it opens up a lot of businesses that might not, you know, aren't going to go under without the money to justifiably say, you know what? Our revenue went down a little bit. Um, maybe we weren't able to hire as fast or, or, you know, lost a customer or whatever, or worried about that in the future. We, we qualify.

• 15:56Anthony Pompliano?

  Yeah. Is that an intentional use of the word support, do you think? Or is that just something kind of, hey, it was put together quickly and could have been clarified better?

• 16:04Speaker 03

  I think the purpose of this was to keep as many people on payroll as humanly possible as fast as possible. And so the, the, to me, and now you and I might disagree about this, but I, so I think they wanted to cast as wide a net as they possibly could, because I think as far as the federal government is concerned, the difference between somebody who loses their job on Main Street or on Sand Hill Road is largely irrelevant to them. They need people to keep their jobs, period.

• 16:29Anthony Pompliano?

  Yeah, that, that makes sense. And, and I guess part of this too then comes down to, if you go to the corporate side, the bailout piece, right? There's this entire conversation around, um, is the bailout to save the company or is it to save the job? Right? And I think your, your, your take is, uh, actually what a lot of the stimulus is doing is it's trying to save jobs. It doesn't really care so much about the company. It's almost, I don't want to say it's, um, indifferent to the survival of the company. It's more so trying to save jobs that generally.

• 16:56Speaker 03

  Well, this particular, the PPP, I mean, it's literally the payroll protection program. I mean, it's explicitly about jobs. Absolutely. Um, yes.

• 17:04Anthony Pompliano?

  Got it. And so on the bailout side, um, part of, uh, what it seems like is you get these private equity investors who are saying, wait a minute, hold on, our guys aren't available for this. Why don't we get it? And my position was, well, listen, you guys got tons of dry powder. You're sitting there. If you believe in the company, put money in, right? And, and this extends all the way even to the corporates where, uh, whether it's United or Boeing or whoever. It's like, look, at some point there's a price where investors will put in debt or equity. Uh, now it may be a dislocation in, you know, what me as an investor or you as an investor believes the value of the company is versus what the executives believe it's worth. But at some point there's a market, uh, and it feels like people are just kind of running to the government. Uh, I, I wrote earlier this week about, or last week about, uh, they're like the idiot in the room.

• 17:46Anthony Pompliano?

  They'll give the most favorable terms that you couldn't get from the private market. Do you agree with that, disagree with that? Kind of how do you see that play out?

• 17:54Speaker 03

  I, I think, I agree with it. I think it actually reflects some of the worst of venture capital and private equity. But here, here's, here's the way I look at it. If you're venture capital or private equity and you've got a business that is actually struggling. You know, maybe it's retailer and they've had to shut stores or restaurant chain.

• 18:09Speaker 03

  Um, they're looking at this right now and saying the most financially prudent thing for us to do is to lay people off. If we have a retailer and we've had to close the stores, it does us no good from a fiscal perspective to, to keep the people on payroll. Now, if we want to keep people on payroll, we have a choice. If we're going to do it, and assuming again, that we're not a wildly profitable company with, you know, billions of dollars or hundreds of millions of dollars in the bank, which few of these companies have, um, what, and particularly if they're private equity backed, they probably got debt interest payments. They do have to keep meeting. Uh, the banks have not given anyone a break on that. Um, so the private equity firm is going to say, okay, we're probably going to lay people off because we're not going to go to our investors, the pension funds, the endowments, the, you know, the sovereign wealth funds or whatever and say, yeah, we're doing a call down.

• 18:52Speaker 03

  We, we need $20 million for company X and we're not doing it to grow the business. We're just doing it to pay people who aren't actually working right now. It's going to be a, to be honest, A, you could actually get sued for that in theory. But another piece of this is remember their investors are struggling also in a lot of cases and having liquidity problems because they had a public market portfolio that's been slashed by 30% in the past three weeks. So the last thing they, and, and you wouldn't be talking about 20 million for, 10 million for one portfolio company. You might be saying to the, your investor, yeah, we're going to do about 50 capital calls today, uh, with just an incredible amount. So their view and the way, when I talk to them is we want the money from the government today to keep people on the payroll. If we have to put money in at some point, that's going to be to keep the actual entity afloat.

• 19:37Speaker 03

  So that when all of this someday ends, there will still be an entity in a building for them to return to. I, I am very understanding of the argument. They've got money. They should invest. I, I definitely am understanding the argument. Somebody's partner should be pulling money out of their own pockets. I think that's definitely true. You've seen in a few cases like Leonard Green, a buyout firm in LA. Um, but again, if the point of this is to keep people employed, if you want to say, you know what? Venture capital firms, private equity firms, you're behaving badly. Fine. Doesn't change the fact someone's going to lose.

• 20:04Anthony Pompliano?

  Yeah, I think this is a really important distinction because you're basically drawing a line between what's everyone optimizing for. The government is optimizing for safe jobs. The private equity investor is optimizing for return on investment and save the company. Right. And actually, those two things are, in some cases, actually opposite of what you would do from an action perspective. One, you fire everyone, the other, you keep everyone. And so it's trying to understand how do you, you know, basically get people to do the right thing in keeping the jobs, which is against kind of the capitalistic view of save the company at all costs.

• 20:36Speaker 03

  It is. And look, they, I mean, there was a solution to this. And we'll see maybe on the bigger loan package, because we haven't seen the rules yet. A solution would have been, of course, taking some sort of equity in the companies. But with the PPP program, it is still pretty small. I mean, again, you know, if you're a 400-person private equity-backed company, again, the maximum loan is 10 million bucks. If $10 million is the difference between, you know, living and dying, that it's probably not the case. This is still for mostly for small businesses. And the federal government, I just, from a logistics standpoint, does not want equity in, you know, 80,000 small businesses across America.

• 21:09Anthony Pompliano?

  Yeah. And so I guess then that brings the question of like, is there concern around like, the extremists would say, hey, this is nationalizing large corporations, right? Whether it's United, Boeing, you know, those types of companies. But at the other side would be, well, actually, the taxpayer should have all of the exposure to the benefit of their capital being used. Right. So whether it's debt with warrants, whatever, kind of how does that playing out or what investor saying there?

• 21:33Speaker 03

  Well, like, I'm, I'm partial to that. I think the government should get equity. If you're giving billions of dollars to a big corporation, they should damn well get equity. The upside shouldn't all be shareholders. You know, it's interesting, Boeing CEO and God, you know, every day now is like a lifetime in this world. But I want to say this, like, three weeks ago, before the CARES Act was passed, Boeing CEO got asked about this. He said, oh, if there are equity strings attached, we're just not going to take in the money. We have all these better options. He never explained what any of the better options were. We asked Boeing repeatedly, no one could quite answer that question because it seems if you had better options, you would take the better options. Like, if I have a better option, that's what I usually take. Why wouldn't I? It's a better option. Um, so like, yeah, look, I think the government should, the government had equity stakes, you know, through TARP. It had equity stakes. In the auto bailout, in in certain cases in GM.

• 22:16Speaker 03

  And yeah, it's an activist investor. Ask anybody at GM. If the government was a passive or active investor, it was an active investor. It should have been. It was a lot of money. It was a lot of taxpayer money. It ended up making people money back. You know, the the federal government ultimately. Made money on the financial bailouts of oh nine on the on the auto bailouts. Um. So it's not a bad, yeah, but I I of course there should be equity for the big checks. Why shouldn't there be? It shouldn't all be private shareholders who who benefit.

• 22:41Anthony Pompliano?

  Yeah. And what happened to the equity in those cases? Like in GM's case or whatever, do they basically hold the equity until there's like debt paid back and then they sell the equity or or how does that?

• 22:49Speaker 03

  Yeah, they they ultimately decide to sell it. Um, you know, every situation is different. You know, you what you really want is the underlying entity to be stable. But yeah, eventually they sell it and they sell it, you know, either on the open market. Theoretically, you could sell back to the company. Hell, in theory, you could sell to a private equity firm. But um, yeah, they they eventually sold it and and they were very public about it. They did it in pieces, et cetera. But yeah, that once. Once the company is stable and there is a market for it again, the government sells it, hopefully at a profit.

• 23:12Anthony Pompliano?

  Yeah, I guess really this then brings a question of like, okay, we get the first kind of wave of stimulus, two trillion dollars. I'm assuming that there's gonna have to be more uh over time.

• 23:21Speaker 03

  It's well soon. Like, I mean, they're already, Pelosi's already got a plan out, the CARES Act two. Uh. It's coming. It's coming quickly because almost everybody agrees that what was in the first one wasn't enough money. Uh. And because it because there's also all sorts of like. In the first one, there was, you know, there was hospital bailout money, which is desperately needed. There is going to be more of that needed. States and municipalities, there was money for them. There's gonna have to be tons more of that. Think about if you're a municipality. That makes most of your money off of sales and tourism taxes, or not most, but a huge amount of your money off sales and tourism taxes. Your city's been shut down for three weeks. But you're still paying your teachers, your cops, your firemen, your sanitation workers, and everybody the same amount. What and and you have to balance your budget usually legally, your municipality or state, and and you have bonds that are due. What are you gonna do about that? You're going to need a bailout.

• 24:05Speaker 03

  And only one entity in America can print money.

• 24:08Anthony Pompliano?

  The the um. The metric I saw or the article was talking about the MTA. How the MTA basically saying like, look, it nobody's riding the subway. It's down ninety percent, right? If if we have ninety percent drop in ridership, how the hell are we gonna pay the bonds?

• 24:20Speaker 03

  And by the way, for airports as well, airports as well.

• 24:23Anthony Pompliano?

  Oh, really? Okay.

• 24:24Speaker 03

  Yeah, airports have bonds that built them and and they. Collect that, you know, when you get your airline ticket from JetBlue or United or whatever, part of what you're paying for is actually the operations of the airport. There's a. Fee in there. Those fees are obviously down eighty percent.

• 24:35Anthony Pompliano?

  Got it. And what are you hearing from like private equity investors, venture capitalists in terms of how does this change the landscape of just business investing in general? What I mean by that is, you know, there's obvious stuff, hey, people are going to start asking, is your company pandemic proof rather than recession proof type stuff, right? But actually, does this make people more gun shy or people getting, you know, kind of salivating and saying, hey, we're going to get more aggressive here. We think there's going to be some cheap buys. Like, what do you see from a strategy standpoint across different firms?

• 25:01Speaker 03

  On the venture capital side, on the early stage side, I haven't seen all that much of change. You know, obviously, the the mechanics of doing things are different. People aren't hopping on planes and hanging out at, you know, Y C networking parties anymore. So the mechanics changed, but there's actually been a pretty decent amount of V C activity in the last few weeks, admittedly, not as much as there was before this, but a decent amount, particularly on the buyout side. So, you know, because if you're a pre-revenue company, you haven't necessarily been affected yet because you weren't selling anything to start with. A bunch of the later stage venture deals have blown up. There's no doubt about that, overpricing, because I, no one really knows what the, what anything is worth now. And then on the, on the buy, the buyouts have largely slowed down. There are some that are still getting done. New ones are pretty rare for two reasons. One is the pricing issue, you know, what is this thing worth? And then B, there's a debt issue. There's

• 25:45Speaker 03

  a question of whether you can issue, whether you can issue new junk bonds, new high yield bonds, which is usually what private equity deals get done with. There've been a lot of these junk bond funds raised in the last couple of weeks, but very little new issuance. Because remember, the banks have to issue it, and then they usually syndicate it out and find other buyers, and they are not at all convinced they can find a buyer.

• 26:04Anthony Pompliano?

  Yeah. And I guess really what ends up happening is if all of the over leverage in the private equity companies is just applying more pressure to them getting the relief they need. Because, you know, if you look at some of these retail restaurants or some of these you've made, I mean, we're talking revenue going to zero. It's not like, hey, it's down 30% just because people are going out a little less. Zero. Where do you get the money to pay, you know, two or three months of, of your debt payment?

• 26:28Speaker 03

  You know, these are huge issues because, you know, it's certain companies just happen to be managed very, very well and happen to have a massive rainy day fund, or more likely, were really lucky when they raised, right? They raised money in January, and thank God they raised money in January and weren't planning to do it in April. No, but it's an enormous problem. You know, in the financial crisis, the leverage, the private equity-backed deals actually survived, most of them survived. There were some big bankruptcies, but a lot of them survived because what the banks said was, okay, look, almost none of you can make your debt payment. So we have a choice. Either we can assume the companies, which we don't really want to do, because among other things, we don't have any internal way to manage company X or Y, or what we'll do is what they started calling amend and extend, which is, okay, your debt payment was due in April, it's now going to be due

• 27:12Speaker 03

  next April, we're going to add a point or half a point of interest on to it, but we're basically going to push you off. And in theory, you could do that again this time, except that this time, you have debt payments from everybody do at once, and everybody wants to extend. Municipalities want to, every corporate does, investment grade and junk bond, individuals who have mortgages, who have car payments, the entire system, there's so much pressure on it on the lender's side, they can't amend and extend everybody. And if they did, in theory, if they did, what you'd end up is that liquidity crunch that we were all freaked out about in 2009, where banks just stopped lending. In this case, would you be justified? Because they have no money, because no one's making the interest payments, which is then, you know, rolls back out in the economy.

• 27:50Anthony Pompliano?

  Yeah. What are you seeing on the pension side with like the LPs, right? So you kind of, you got the companies and you get the investors, and then you go all the way out to the LPs. A lot of them are left, especially public pensions, holding kind of this corporate debt or kind of credit issues. But what are you seeing on that?

• 28:05Speaker 03

  We're seeing something called the denominator effect, which we last saw in 2009. And with the denominator effect, basically, if you're a corporate pension or a public pension, your allocation, say, to venture capital is maybe 5%. And, but that 5% number in terms of real dollars, it's 5% of the overall assets of the pension fund. So if the pension fund is doing really well in the stock market, that 5% means more actual dollars going to venture capital. If your stock market portfolio has gone to shit as it has now, suddenly it's a lot less. And so you have a lot of pension funds that thought they were under-allocated three months ago, or three weeks ago, who are now very over-allocated. And what I'm hearing from pensions and from endowments, particularly, remember, endowments also, because they don't have students physically in the dorms right now, and they've got their own financial issues.

• 28:48Speaker 03

  Is that they are saying to to investment firms, look, we can generally still make capital calls if you have them. But in terms of new fundraising, new fund commitments, you better be best of the best for us to be doing this. This is not the time to be raising a new fund. There have been a bunch of fund closings announced recently, but almost all of those were commitments that were baked in months or weeks ago.

• 29:08Anthony Pompliano?

  Yeah, the the endowment game is always so funny to me. I tweeted the other day. I said, I think we're going to see a lot of exposure of universities, basically their asset management firms with just schools ready for the tax benefit. But we'll see how many of them actually dip into the endowment. And, you know, part of the endowment is there to bring me day fun type stuff. And there's been a number of schools now that have laid off. Really, I think they're laying off vendors, right? Or kind of severing ties with vendors who then lay off the cafeteria staff or maintenance staff, etc. But you hope to see, again, going back to, are you optimizing for kind of your P and L at the school? Or are you optimizing for saving jobs? If they want to save the jobs, then they can kind of dip into that.

• 29:45Speaker 03

  They they also have huge question marks, right? Like, a lot of these schools, they make a lot, a lot of them, not all of them, a lot of them make a lot of money in the summer of summer programs, which unlike during the regular year where so many people are on scholarship, those summer programs, people generally, not exclusively, are paying for them. And particularly, people from other countries like China are coming in and paying for them. They're they're possibly facing none of that revenue. And there are, look, there's still legitimate questions if they're opening the doors again in September. And if they don't, what exactly does that mean for them? And by the way, are they going to be opening the door for people from China to come in? Students? I don't know.

• 30:16Anthony Pompliano?

  Yeah.

• 30:16Speaker 03

  I don't think they know.

• 30:17Anthony Pompliano?

  Do you think this changes the way that people view kind of higher education? Like, the whole idea of, I saw a couple tweets flying around, like, hey, I'm paying $50,000 for my kid to sit at home on Zoom, right?

• 30:27Speaker 03

  I mean, look, I don't think anyone would argue that you get a better class experience in person if it's a decent school. And there's certain things you can't do at home, right? If you're a biology major, chemistry major, you're, you can learn things. You can't do what you could do, and you can't have the same discussions. I mean, look, there are, there is telelearning. That's the thing. And just like, we can work remotely, and a lot of people do. But there is an argument that to be made that there is a difference still between a meeting in Zoom and a and a meeting face to face, that different things happen, different, you know, you have conversations more organically or different, you know, in a video conversation. Or on a phone call or or in person. I think you just do. As a reporter, I can tell you if if I sit down with someone for thirty minutes in a coffee shop, I almost always get more out of that than thirty minutes on the phone or thirty minutes on a video conference. You just do.

• 31:12Speaker 03

  I think that'll come true in schools. To a plus, as you and I both know, you know, of as far as the students are concerned, the experience of college of being there is a lot bigger than the classes.

• 31:22Anthony Pompliano?

  Yeah, fif- fif- at least fifty percent is the social side of it.

• 31:25Speaker 03

  At least fifty percent.

• 31:27Anthony Pompliano?

  Uh, and then obviously Silver Lake, they they've made a bunch of big moves recently, uh, both the Twitter deal and then they just announced about a billion dollars in Airbnb. What um, what what do you see on that from?

• 31:37Speaker 03

  Uh, so they're interesting because they're about to launch fundraising with the whole thing I just said, don't raise money. Uh, they're going to, apparently they're gonna try to raise sixteen billion dollars for their for their new general fund. Uh, and and they'll get it probably too. Uh, Silver Lake is interesting because they've had some struggles. Uh, WME, which is William Morris Endeavor, um, which also happens to own Ultimate Fighting Championship and Professional Bull Riding recently, uh, which was supposed to go public last year, wasn't able to, just had to lay off a bunch of people. Um, just think of what they do. They represent actors and people in the entertainment industry and there is no entertainment production right now at all. You can't sign someone to a deal when there's nothing to do. Um, but they're having some struggles there, but but Silver Lake's looking, I think, at Airbnb as a pretty good opportunity. Um,

• 32:15Speaker 03

  I, you know, we don't yet know what deal terms are on this, but I'm sure they got a better deal than they could have five months ago. And Airbnb is obviously, they they say they've got enough cash. But obviously, as a company that could use some extra liquidity and some extra cushion, given that their business is basically shut down.

• 32:30Anthony Pompliano?

  Yeah. Do you think that Silver Lake, uh, anything changes at Twitter, uh, after they come in?

• 32:36Speaker 03

  It it's hard to say. I mean, because because there's a activist hedge fund, uh, Elliot, that that's also in there and helping drive the ship. They help bring Silver Lake into that. You know, it's interesting, you know, Elliot and Silver Lake both got into Twitter before all hell broke loose. So I I think, like a lot of things, uh, ask me again in six or eight months, hopefully when things are back to normal. I I think when I talk to investors on the private and the public side, they all basically say that, you know, Q one and Q two of two thousand twenty are are just written off, you know, performance, good, performance, bad, it's irrelevant. We we can take nothing from it in terms of how this company is going to perform long term, maybe outside of, you know, an outlier like a Zoom.

• 33:11Anthony Pompliano?

  Yeah, for sure. Uh, Carnival Cruise, we just saw the uh, the big steak. What what what's your take there?

• 33:18Speaker 03

  Oh, cruise companies. Uh, I mean. I I don't have a particular take on it except, look, I I'm not a cruise person, but like the every time there is any sort of, you know, you almost know going on to a cruise ship, you're going to get sick with something. So if there's going to be a pandemic, they're going to get, you know, even more sick. It's a it's a disaster. I mean, this is the worst thing that could happen for a company like them. It's like amusement parks or other tourist things, except, you know, when Disney decided to close, they didn't trap everybody inside of Thunder Mountain for three weeks. Like, they let you leave. It's awful. Look, there is a business there. People love cruises. I I am curious, though. You know, when you talk about how the economy will eventually come back and what will open and what won't, and you know, you know, you're where, as you said, the Yankees sat. If the Yankees announce in three weeks, you know what? Opening day, we're going to play a game. How many people show up at Yankee Stadium?

• 34:03Speaker 03

  That goes, you know, exponentially for a cruise flight.

• 34:06Anthony Pompliano?

  Yeah, the the the thing I saw was the Saudis took an eight point two percent stake in Carnival. And it's very interesting because you get almost the the pricing conversation comes into play, right? It's like, has it bottomed? Has it not? You've got some people who've got a ton of capital sitting around the table and are they going to get excited early or they should timing it correctly? And that goes for the soft banks of the world, the Saudis, et cetera, kind of all around globe.

• 34:29Speaker 03

  I think I think everybody's having to make a guess on when all of this ends, right? Because in theory, if you and I are still stuck in our house in August, it's entirely possible to say that the Saudi stake goes to nothing and the company was bankrupt. Like, they're, you know what? Do it cares act too great. There are only so many federal bailouts.

• 34:46Speaker 03

  And so that's the bet, right? The bet is really a timing bet on the virus as much to me as much as it is on the companies. And and they're trying to time it out and say, okay, they might be able to start, you know, putting ships out again in, you know, make it up, August, July, September. They're making that calculation. I assume the Saudis are, but everyone's just guessing. Nobody has a clue. You're you're just making your best case scenario. You're you're seeing this in state government. You know, budgeting committees are saying, well, best case scenario, stores reopen in July first. Worst case scenario, they don't. Schools come back, schools don't.

• 35:15Anthony Pompliano?

  Yeah, the the ones that just caught my eye was, I think it's DC and Virginia both announced stay at home orders till June 10th is kind of the current guidance. And, you know, that's pretty far away. We're talking, you know, 70 plus days away or so.

• 35:28Speaker 03

  It's pretty far away. But I mean, the the thing that would be worse, you could argue, is if, and this is why Trump's whole, you know, we're going to reopen things by Easter, which is this weekend, this Sunday, which is just nuts to think that he was saying that a week ago, is, you know, the worst thing that would happen would be that that everything would start reopening. People would go out and then we'd all have to go back into lockdown because the the crisis of confidence from that would be extraordinary. One thing, though, is we still don't really have any sort of answers on how we're going to reopen, because we haven't done the kind of contact tracing that is required, that was done in South Korea, that was done in Taiwan. Um, it's unclear how we're going to know when it is, quote, safe to go back to work. Uh, like, you know, I haven't gotten sick yet. Maybe I have, right? Maybe I was asymptomatic.

• 36:13Speaker 03

  But how is anyone going to know? How am I going to know that it's safe for me to not get other people sick by going into a store, going to my kid's school, any of that? Um, we haven't done any of that stuff. You know, I I don't know who I know or who I came into contact with, who has tested positive. We don't have enough testing to just test everybody, which would be the ideal thing to do. And then you could literally just quarantine X percentage of people for 14 days and be done with it. Um, we don't have any of that in place yet. We are so far behind. I I I think June 10th is optimistic.

• 36:42Anthony Pompliano?

  Yeah, I I I don't think that June 10th, everyone's going to just walk back out their door and go do what they were doing before, right? It's just, um, a lot of people saying, hey, the world we're going back to is going to look different, right? Whatever that ends up being. Uh, but then that leads to the conversation of how many small businesses can actually survive, uh, till June 10th without revenue, right? It just, it feels to me like we're talking double digit percentage of them that don't come back.

• 37:07Speaker 03

  Absolutely. You know, the way I viewed it, I was driving through Boston the other night. And obviously, it's a weird city right now because it's very, very dark. You know, so many, it was like 8:00 PM, so it was dark out, but so many restaurant storefronts and stuff were, you know, there were no lights on. And it occurred to me that when the world comes back, I'm going to drive through those same neighborhoods. And what I'm going to see is I'm going to see a bunch of lights that are on, but then a weird number that are off. Instead of all being off, almost like it's 2:00 AM, it's going to be 8:00 PM and a bunch will be on, but a ton are going to be off. You're going to see just, yeah, this weirdness. It's almost like when you're in a city that's got like a bunch of abandoned buildings, it's going to be a bunch of abandoned stores, lots of them.

• 37:44Anthony Pompliano?

  Yeah, in New York right now, it's got to be 75, 80% of storefronts are just off, right? They're just not operating at all. And you know it's bad when they've literally boarded up, like, and I'm not talking about like the Saks Fifth Avenue type stuff. And I'm talking about literally like the local bar has boarded up their doors and they just don't expect to come back for a while.

• 38:01Speaker 03

  And there's questions, you know, the commercial landlords in this, many of whom are actually behaving pretty well. I'm giving people deferments on rent or even giving rent, but they're paying, they still have their mortgages to pay. And so you could also have buildings go bankrupt. You know, in theory, when things come back, it's entirely possible that landlords are going to say, you know, to potentially new tenants, the new pizza shop, we won't charge you rent for the first three months. You know, they're going to beg people to come in because they're going to have this problem as well. I think there's going to be a lot of giveaways at the beginning, but somebody gets screwed in it. Somebody always does.

• 38:30Anthony Pompliano?

  Yeah. Do you think that if this lasts long enough, we do see kind of the full waterfall effect? Where you get the businesses, the investors are all, you know, kind of turned upside down. Then you do get the commercial real estate impact all the way out to the banks? And even could see some liquidity issues with the banks that you were kind of alluding to earlier?

• 38:46Speaker 03

  I do. I wish I didn't. I see this as a really dark hole. I really do. I see it, and we're writing a little bit about this in the next couple of days. As I said earlier, the municipal and local government side, you know, it's one thing for, quote, Detroit to go bankrupt or, you know, 40 years ago, New York to go bankrupt. And you say, okay, this is a poorly managed city, a poorly managed county or town, or they had a, you know, an earthquake or something. But we'll deal with that because the state can backstop it. State's not going to let, you know, a town or city go under. But no state has ever dealt with dozens of towns or cities and counties going under. And they don't have the money to backstop them all. And what happens then? Do you have to lay off all the teachers? Like, what's the backup plan for a school system? What's the backup plan for police and fire departments or sanitation?

• 39:30Speaker 03

  Like, thi- this thing to me, you know, the comparison to the financial crisis. In the financial crisis, we knew in retrospect, like after it started, we knew where the source of the problem. We knew where the original crack of the dam was. So the job was plug the hole in the dam and then go clean up all the water that has flooded everywhere. And that wasn't easy, but you knew you could find it all. In this case, to be honest, in this case, the dam has been blown up. There, there are so many cracks, you can't even see the concrete anymore. And I, I'm a bit apocalyptic about this. I don't quite see outside of a treatment real soon or a vaccine real soon. So treatment more likely than vaccine. Best case scenario, vaccine is early next year. I, I, I see this being, it's not even a domino effect.

• 40:13Speaker 03

  It's a bunch of kids playing Monopoly and one gets pissed off and kicks over the table. And the dog eats some of the houses in the hotels. There's just not, you know, it, it just all blown up.

• 40:21Anthony Pompliano?

  Yeah. Uh, do you think that we'll see bailouts of the pension funds?

• 40:26Speaker 03

  We might, but again, there, there comes the question of is the Fed's balance sheet truly limitless? Like, okay, they bailed out small businesses. They bailed out large businesses. They've already said they're bailing out hospitals and then they're doing some bailout to cities and towns. Like, at, at what point do we stop? And at what point does massive inflation begin? Um, but are pension funds going to need bailouts? Absolutely. Public pension funds, uh, transportation pension funds, all of that. Absolutely. Yeah.

• 40:50Anthony Pompliano?

  Yeah. You, you, uh, you, you saw around the corner. So if we see the massive, uh, bailouts all across the place, at what point do people question the currency? And they just say, look, you know, it, it, the, the bread got more expensive, you know, from last week to this week. But, you know, I, I don't think we're quite there yet, but this is the path to that world. If we're going to go to that world, right?

• 41:10Speaker 03

  It is. I mean, you know, the, the only saving grace potentially is in the financial crisis, the people looked at it and said, well, it's possible the entire financial system is going to collapse and, and we don't know what, what, what's under that and what happens. In this case, everyone knows that this will end, which is different. Like the, the, the, the, the source of this coronavirus is going to be, might be next year, but there will be a vaccine. There will be a treatment. That curves will bend, all that stuff. And so, I mean, you saw, you know, we're taping this, uh, what's today, Monday, and the markets went up a lot today. That's the only saving grace is that if there are enough long-term investors who decide that they believe in these companies and this economy long-term. For Silver Lakes that believe in the Airbnb or Saudis who believe in Carnival.

• 41:51Speaker 03

  That can get us through this and if on the pension, on the pension fund side and that their public equity values just won't be absolutely demolished. And there will be money they'll be able to sell stock that can then pay the pensioners or get dividends that will pay the pension.

• 42:04Anthony Pompliano?

  Yeah, in some weird world, it's almost like the private investors are bailing out the government by plugging some of those holes you talked about, right? So the government doesn't have to step in and print even more money to then go ahead and stop the holes themselves.

• 42:15Speaker 03

  Absolutely. And I mean, look, that's partially how the system is supposed to work in terms of this stuff. The problem is there are these holes that are not equity holes that are debt holes and those people can come and buy debt, but it doesn't work the same.

• 42:27Anthony Pompliano?

  Yeah. Uh, last question for you. What's the one thing that you're paying attention to that either other people haven't noticed yet? Or you think more people should be paying attention to either a cool story or just some kind of structural issue that you see that people aren't talking about?

• 42:41Speaker 03

  I think it's, it's the future repu-, on the investment side, on the venture capital and the private equity side. Reputation. Um, what you're doing now that might not be viewed as in your best short-term fiduciary interest. But it, will it come in and pay you back in the end? You know, back in two thousand and one, two thousand and two, after the dot com crash. You saw a lot of venture capital firms decided, granted, sometimes their limited partners had to push them to do this. But they cut the size of their funds. So, you know, they would say it raised five hundred million dollars in nineteen ninety-nine. And by two thousand and one, they realized, wait a minute, we can't reasonably invest this anymore because valuations are now cut in half. Maybe the sorts of companies we're investing in don't exist anymore.

• 43:23Speaker 03

  So we have a choice. We can either continue to collect the fees off of this every year and get rich. Or we can say to our limited partners, you know, you committed fifty million dollars, we're cutting the fund in half, you're only on the hook for twenty-five. And if you look back from that, the, for the most part, the funds that cut their fund sizes all still exist and it's been twenty years. The ones that didn't, that Were really egregious about it are almost all gone because they, they, they, I mean, you know, the limited partners were on the hook. They were contractually on the hook. They paid the money they had to pay and these people now all live in good houses. But, you know, people remember, people remember if you act well or you act badly in a crisis. I think that's definitely going to be true for private equity firms as well. Ultimately, whether you're a startup or you're a company that's going to be taken over, you can choose who is taking you over and you can always just take the best price.

• 44:08Speaker 03

  Or you could choose somebody who you think is a good actor. And I, I do believe in karma and I believe good actors are going to be paid back in the end for the way they act during this. Cause this is an unprecedented time. And honestly, most venture capital firms, most private equity firms, the partners themselves, the management companies themselves, they have a lot of money. They can do a lot of this bailout work themselves, even though it hurts.

• 44:29Anthony Pompliano?

  Yeah. I, I think it's a great message of just, just be kind, man. Just, just try to do the right thing and, and you may actually may not get it right. But, but I think people understand kind of the ethos and, and the intention behind a lot of this work, even if people don't get it right exactly, they still understand what somebody's trying to accomplish.

• 44:44Speaker 03

  Absolutely. Agreed.

• 44:45Anthony Pompliano?

  Yeah. Where can, uh, where can people go find you on, uh, on the internet?

• 44:48Speaker 03

  On the internet. Yeah. On the interwebs. Uh, you can get the Pro Rata newsletter at signup.axios.com, uh, Pro, Axios Pro Rata Podcast on iTunes and Spotify and all those fun things. And then on Twitter, at Dan Primack. That's Dan, P R I M A C K.

• 45:03Anthony Pompliano?

  You're, uh, you're one of the most well-connected people in, uh, tech and finance. So I appreciate you coming on and, uh, share some of the insights. I think people enjoy this.

• 45:10Speaker 03

  Thanks for having me. Appreciate it.

• 45:12Speaker 04

  Hey everyone. Pop here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the apple, Spotify and other podcast charts, please do us a favor and rate, review and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.