Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: Inflation’s Descent, Sam Altman’s SPAC, and Private Equity’s Latest Target About this episode This week on Prof G Markets, Scott breaks down what the latest inflation data means for the American economy. He then shares his thoughts on OpenAI CEO Sam Altman taking a nuclear power company public via SPAC. Finally, he explains why private equity firms are circling mom-and-pop businesses.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:18 Scott Galloway? This week's number one. It's the one-year anniversary of Prop G Markets. Similar to my first newborn that I had out of wedlock when I was a very young man, I'm hoping that at some point I too can sell this for a new car.
1:43 Scott Galloway? Welcome to Prop G Markets. Today, we're discussing inflation's cool down, Sam Altman's SPAC, and private equity's interest in plumbing. Here with the news is Prop G Media Analyst Ed Elson. Ed, what is the good word? Where are you?
1:59 Ed Elson? I'm in New York. We're having drinks tonight, Scott.
2:02 Scott Galloway? Oh, I knew that. I'm excited about it.
2:03 Ed Elson? You seem very excited.
2:06 Scott Galloway? Yeah, I'm trying to think, wait, before, after the prostitute? Yeah, I've got it on my calendar. Hold on. Yep, yep, good, good, good, good, good, good. Where are we going?
2:13 Ed Elson? Shouldn't you know the answer, I guess, here?
2:15 Scott Galloway? No.
2:16 Ed Elson? I think we're going to the Equinox. They have like some bar in midtown.
2:21 Scott Galloway? We're going to the gym?
2:22 Ed Elson? I think that's right. I think we're going to an Equinox bar. That's right.
2:25 Scott Galloway? I don't buy that.
2:26 Ed Elson? I think, I think that's right. I think it's some sort of Equinox spinoff.
2:29 Scott Galloway? Going to an Equinox bar.
2:30 Speaker 03 It's called Electric Lemon.
2:32 Scott Galloway? Thank you, producer Claire. What's it called? Electric Lemon?
2:35 Ed Elson? Isn't that like an Equinox thing or am I?
2:38 Speaker 03 I have no idea. I'm not even gonna be there. I'm stuck in Chicago because of tornadoes.
2:43 Scott Galloway? Dude, just because you're hanging out in the showers of the gym, it's clearly on your mind. What's it called, Claire? Electric Lemon?
2:50 Speaker 03 Yeah, Electric Lemon.
2:52 Scott Galloway? You know, that's interesting. That's right. That's my favorite brand of edibles.
2:56 Scott Galloway? That and Gorilla Panic and They're Coming, They're Coming. Those are my favorite because I like the stuff that makes you paranoid. All right. So what are the headlines, Ed?
3:07 Ed Elson? Let's start with our weekly review of market vitals.
3:16 Ed Elson? The S and P gained as did Bitcoin. Meanwhile, the dollar fell as did Treasury yields. Shifting to the headlines, more than 150,000 TV and movie actors are striking along with the screenwriters whose efforts we covered on a previous episode. This marks Hollywood's first industry-wide shutdown in more than 60 years. A federal judge denied the FTC's attempts to block Microsoft's $70 billion purchase of Activision Blizzard. The FTC says it plans to appeal, but if the deal goes through, it will be the largest tech acquisition ever. Disney extended its contract with CEO Bob Iger for another two years through 2026. That kicks its succession plan further down the road. Shares rose 1% on the news.
3:59 Ed Elson? Elon Musk launched an artificial intelligence company, XAI, stating that its goal is to, quote, "understand the true nature of the universe." And finally, Meta's Threads, which we discussed last week, reached 100 million users in just five days. According to data from web analytics firm SimilarWeb, traffic at Twitter was down 5% in the first two days after the Threads launch, and it's down 11% from the same time last year. Scott, reactions?
4:26 Scott Galloway? I think the opportunity here, the meta opportunity for Meta is to recast themselves as the good guys. Deploy age verification, err on the side of content moderation.
4:37 Ed Elson? Do you think they'll start running ads soon?
4:39 Scott Galloway? Yeah, they'll turn it on and they have great advertised relationships. Their advertisers trust them. I'm fascinated by this thing. It just strikes me that only Elon Musk could have starched the hat of Mark Zuckerberg white. He just unintentionally made Mark Zuckerberg a lot less unlikable. The artificial intelligence company XAI, I think anytime Elon Musk does anything, you have to take it seriously because he'll bring so much attention to it by virtue of who he is. The statement, which I thought was also quintessential Elon, was this so oxymoronic and contradictory. He says that its goal is to understand the true nature of the universe.
5:20 Scott Galloway? And then the next statement was, I think that existing AI is too woke. It's like, well, boss, okay, maybe the universe has decided that is the truth. I mean, it's like claiming to be the pursuit of truth means you're open to finding out ideas and that you don't know the truth if you're pursuing it. And then to state that I'm trying to pursue the truth, but I'm going to try and train this thing to pursue my version of the truth. I just, I don't get it. But.
5:50 Ed Elson? He also said, well, first he said, if I could press pause on AI or advanced AI, I would. But then he said, it doesn't seem like that's realistic. And then he said.
6:00 Scott Galloway? Let me start my own company.
6:01 Ed Elson? Said he wants to quote, grow AI in a good way to be quote, maximally curious and maximally truth seeking. And I think I was thinking when he said that it's like, imagine if you walked into a pitch meeting with a VC and you're like, they're like, what's your company? It's like, oh, we, we have an AI company. It's like chat GPT. It's like, what's your key differentiator? Oh, ours is maximally curious. Compared to all of the other AIs, ours will seek the truth. It's just, it's such a ridiculous premise. It's not a differentiator at all.
6:31 Scott Galloway? I mean, for me, a lot of this is bubbling up to a kind of one notion. And that is, I believe in a wisdom of crowds. I believe in democracy and a key component of that is no one entity or individual becomes too powerful. And I just think it's, we've reached a point where in addition. We have such out of control income inequality that we end up with a large part of our GDP doesn't pay taxes because they're so powerful, they weaponize government. Oh, what do you know, you get a tax break in the first 10 million or 10 times your principal for a small business or venture investment. Oh, what do you know, capital gains is much less than current income. Who registers capital gains? Rich people. I mean, it's just, what it comes right down to is power corrupts, and I'm just not sure any individual should have, I'm sounding like Elizabeth Warren or Bernie Sanders, I believe
7:12 Scott Galloway? in billionaires. I don't, you know, I'd like to be one someday, but when people have a couple hundred billion dollars in wealth, I'm not sure that isn't, doesn't turn on itself and become a bad thing. Disney and Iger, I think he fucked up. I think he should have played golf and bought more cashmere sweaters. He's, he's literally the guy who signs up for another tour of Afghanistan and forgets how awful it was, or that things have gotten worse since the last time he was roaming around. And, you know, he's talking about selling some broadcast assets. It's a really difficult business right now. It's good for the company. He's a thoughtful person and a grown up and the markets like him. Microsoft, it's in the law, at least antitrust law is interpreted by the judges, is definitely
7:55 Scott Galloway? siding with, call it unbridled market forces and capitalism. I like Lena Kahn. I wanted her to win here. I think it's inspiring that they put a young academic in this position of power. If she doesn't get a win pretty soon, the agency just looks flaccid.
8:10 Ed Elson? Did you not feel that during the tech recession from last year, I mean, obviously everything's back up again, but didn't, wasn't that sort of a signal to you personally that maybe these tech companies aren't as safe and secure as we'd thought? Like, you know, the fact that you had all of these companies down, what, 80%, 70, 60, 70, 80%? That's sort of a signal to me that they're not, they're not completely protected. They don't have total monopoly power. They're still vulnerable. Are you as worried about monopoly power in tech as you used to be?
8:45 Scott Galloway? I think it's a fair point, and that is, does the market do its job? The biggest pushback I get is that the market is a better arbiter than some, you know, angry professor with ED pushing government or rooting government on.
8:58 Scott Galloway? And the market in some senses does punish these firms. But if you look at the real monopolies, Amazon, Apple, Meta, Alphabet. Okay, there was a buying opportunity. I mean, one buying opportunity does not make a healthy market. And now they've all ripped back. And look what's happening with Threads. It's, it took a monopoly to take on Elon Musk. That all of these innovative startups, Blue Sky from Dorsey, Post from Noam Bardeen, you know, Mastodon, they've kind of hit this giant windshield because they don't have this canon of 3 billion users. And there is something uncomfortable about, you know, the monopoly in social. Meta shows up and boom, gets to 100 million users.
9:43 Scott Galloway? That it's a larger existential question about concentration. It's just so weird to be rooting for Mark Zuckerberg. And I think that Twitter, I mean, I was thinking about this. We're writing a post about this for No Merci No Malice. Twitter is literally the largest self-inflicted wound in the history of big tech. And what do we mean by that? If Elon Musk had never downloaded the Twitter app, he'd be the, not only the most powerful person in the world, he'd be the most beloved. Because when you see him in interviews, he's more measured. He comes across as thoughtful. He comes across as a reasonable guy and his achievements just sort of speak for themselves.
10:24 Scott Galloway? But unfortunately, an app that lets your id take over and, and reduces all impulse control. What's happened is this app has done something terrible for him. And that is, it has let him reveal his true self. And his true self is he's an asshole. People, at the end of the day, they're, I don't want to call it karma, advertisers and employees and regulators don't want to work with, cooperate, or ally with assholes. And think about if he'd never tweeted. Think about if he'd never spent $45 billion and fired six of these 8,000 people. He would literally be the Jesus Christ of this generation. And now he's this very polarizing figure.
11:08 Scott Galloway? I don't think Meta would have watched Threads if it hadn't been for Elon Musk. I think they would have just left it alone. Anyways, greatest self-inflicted wound in the history of big tech. We'll be right back after the break with a look at inflation.
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13:45 Ed Elson? We're back with Prof G Markets. U.S. Inflation fell to 3% in June. That's its largest slowdown in more than two years, down from 4% the month before. This is a huge win for Jerome Powell and the Federal Reserve, who've been raising interest rates to tamper inflation since the beginning of 2022. This time last year, we were looking at more than 9% inflation. Still, inflation has not yet reached the Fed's target rate of 2%. Plus, core inflation, which doesn't include volatile food and energy costs, is proving stickier. Prices are up 4.8% from a year ago. The Fed paused rate hikes at its last meeting in June, but it's made clear that there will be further increases before the end of the year. Scott, what's your reaction to the inflation news?
14:30 Scott Galloway? I think Times Person of the Year will either be Zelensky or Sam Altman. Maybe it already was Zelensky. I don't know, but it should be Jerome Powell. It should be Chairman Powell. I think he's been an extraordinary leader. Everyone was second guessing him. People going on CNBC, who had interest rate-sensitive businesses, saying he was creating the Weimar Republic. Silicon Valley Bank, this is a direct result of an increase in Elizabeth Warren. You know, Senator Warren, you know, going crazy about the increase in interest rates have resulted in... I mean, this guy's come under huge pressure and he's just been steadfast. And now our inflation is the lowest, I think, of any OECD country. And they're just not getting around it. When you have a lot of inflation, wages don't keep up with it and people's quality of life goes way down.
15:13 Scott Galloway? And he has been steadfast and he's just ignored all the noise, looks at the data and says, "Yeah, banks failing is bad. Yeah, people's mortgages and credit card bills going up is bad." You know, no doubts. There's, you know, this is a bad decision between bad decisions. But he's like, "The worst isn't runaway inflation." You can... Inflation's one of those things, once it gets out of control, it is out of your control. And it's how a society and an economy can literally collapse. And he said, you know, not on my watch, girlfriend. And he implemented a series of exceptionally unprecedented and exceptionally painful interest rate increases, and it looks as if it's worked. And it's not all him. I think there's certain deflationary features.
15:58 Scott Galloway? The supply chain is getting ungunked. I think even AI is probably responsible for some deflationary forces as I think the layoffs in big tech and the prospect of AI has probably made some people not quite as confident in their salary negotiations. But I think this is a huge victory. And as usual, it prompts the following question. If you don't think the American economy is strong, where would you rather be? And so we're bringing inflation down, but we have historically low unemployment. I mean, okay, that's pretty much the Goldilocks economy right now. So I think it's amazing you included that. And the Miami, Fort Lauderdale, West Palm Beach area has a 9% inflation rate, more than double the national average. I think that's because you and Claire had my credit card at the strip club 11.
16:43 Scott Galloway? I think that is, I think that's what's going on here. That's easy two points to that nine points. But I think this is, I think this is a huge victory for the US and for Chairman Powell.
16:55 Ed Elson? Yeah, 100%. I mean, you think back to the conversations that we had a few months ago where we had all of this doomerism around hyperinflation. So Jack Dorsey put out a tweet, he said, hyperinflation is going to change everything that's happening. And then we also discussed that Balaji Srinivasan bet where he bet $1 million in March that the US would enter hyperinflation within the next 90 days. I just, I looked up the definition of hyperinflation. This is what these people were predicting. Quote, rapid excessive out of control price increases, usually exceeding 50% per month or 1,000% per year. And we were taking this stuff seriously. And
17:36 Ed Elson? Once again, the catastrophists and the doomerists have been proven wrong. And I guess the thing that I'm feeling on this news is I hope that we remember this moment and that we mark this moment because next time, I mean, there's going to be another period of relative instability compared to the past and compared to other nations. I just, I, when everyone starts shouting that the Fed is corrupt and that people like Jerome Powell don't know what they're doing, they're sort of these bureaucratic idiots who are clouded by their bureaucratic backgrounds or whatever it is that makes people distrust these people, I, I just, I hope we remember that the safest, most sensible bet is almost always to trust the experts in the US government.
18:19 Scott Galloway? Most importantly, let's bring this back to daddy. And when I say daddy, I mean Prop G. What was my prediction around inflation, as I know you actually follow my work at? What was my prediction about inflation?
18:30 Ed Elson? Come down faster as it went up?
18:31 Scott Galloway? It's exactly what I said, that it was going to come down as as fast as it'd gone up. My prediction is that inflation is going to fall dramatically.
18:38 Ed Elson? I think we're going to see inflation come down almost as fast as it went up. I think inflation is going to decline as precipitously as it ascended.
18:44 Scott Galloway? So I, I think this is great. The dollar has come down, which is probably a good thing, you know, depending on what side you are, probably helps in terms of our export economy. I think we're right to question government and we're able to do that at the ballot box. And government gets it wrong all the time, but I find generally the people in government are generally some of the most talented, hardest working people. And I'm very happy. Chairman Powell, Chairman Powell.
19:08 Ed Elson? Are you chalking this up as a W? Like, are we out of the woods?
19:12 Scott Galloway? No. I mean, you could, you could see it rip back. You don't, you don't want to, we don't want to declare victory. Plus their target, I think, is like two, two and a half percent. And some of it was, I guess the biggest factor was rents. Rents have come down or they've slowed down. Is that what it is?
19:26 Ed Elson? Yeah, yeah, yeah. But if you look at air travel, weirdly, it's down eight percent.
19:31 Scott Galloway? I wonder if people are running out of money. Supposedly there was about a trillion dollars of stimulus left and consumers were ripping through about a hundred billion a month, meaning that the, the end of the party, the lights were starting to come on. It's like when they play, when I used to go to clubs into the 2000s, I used to do it a lot, Ed. I used to go out a lot. I used to go out a lot. And I'd walk in and I'd get shitty drunk because I'm a lot more confident, a lot more likeable when I'm drunk. And at the end of the night, you know, 2 AM, whenever it was closing, 4 AM, they always play Come on, Eileen. That was their way of saying, get out. They'd start playing bad, bad 80s music. And this feels like, hopefully, this is the end of inflation.
20:22 Ed Elson? Sam Altman, the CEO and founder of OpenAI, is planning to take a nuclear reactor company public via SPAC. As a reminder, SPAC stands for Special Purpose Acquisition Company. It's where you list a shell company on a public exchange with the intention of acquiring a private company at a later date. SPACs had their heyday two years ago, but have since declined with SPAC issuance down 96% from the first quarter of 2021 to the same time this year. Now, in Altman's case, the target company is Oclo. Oclo is a nuclear fission startup whose mission is to, quote, "provide clean, reliable, affordable energy on a global scale." Altman invested in the company back in 2015, and the SPAC is expected
21:03 Ed Elson? to raise $500 million at an $850 million valuation. Now, Scott, we've discussed the decline of SPACs on this show before. Is this a signal that the SPAC market could be making a comeback?
21:17 Scott Galloway? This is going to be a really interesting battle that kind of indicates or provides some insight into what are more powerful forces, both on the positive and the negative side. So, well, let's just call them opposing forces and not assign which is positive and which is negative. On one side, you have the brand equity of Sam Altman. He's got an incredibly strong brand. He's considered much smarter than he is, not that he isn't brilliant, because of ChatGPT, and he seems thoughtful and has built kind of this new technology, or is kind of associated as the iconic figure on this new technology. So that is very positive, or, you know, one side of the force. In addition, you have nuclear. And nuclear is finally getting, in my opinion, warranted attention and renewed interest. And if you're going to move away from fossil fuels,
22:03 Scott Galloway? It feels pretty logical that nuclear has to be part of that mix. So nuclear and Sam Altman, you know, peanut butter and chocolate, really a good tasting combo. On the other side, on the other side, you have a company that is either pre-revenue or very small revenues and you have what is arguably one of the worst brands in the financial services sector, SPAC. So which of these forces is more powerful? And what we'll, what we'll find out is sort of, you know, on the day of the offering and 30 days post the offering, is it like every other SPAC that's gone down 70, 80, 90%? Or is this going to give breed new life into the SPAC market because Sam and Sam and nuclear or Suclear? Suclear, which will win here? Suclear or Spevenu?
22:48 Scott Galloway? It's just going to be really interesting. And if this thing, if this thing holds its value or goes up in value, I think what it's saying more, maybe the larger indication or indicator will be that the animal spirits are back, that if people are willing to buy SPACs again, it means we're doing rails in the bathroom again, Ed. I mean, it's, it's okay. Live for today. Don't worry, you know, the markets are back, baby. This will help inoculate, you know, be an antibiotic prophylactic against the criticism people soon fall under. And that is that these LLMs are similar to Bitcoin, consuming a massive amount of energy. And someone's going to start doing the math here that these things are warming the earth
23:30 Scott Galloway? as we figure out, in the voice of Scott Galloway, please give me some, some unbeatable pick-up lines. Hello, ladies. Hello. Do you believe in love at first sight or should I walk by again? That's it. That's, that's where the magic happens. How about breakfast? Should I call you or should I nudge you? That's right.
23:51 Ed Elson? Let's focus on this company for a second.
23:54 Scott Galloway? Okay.
23:55 Ed Elson? As much as I love Prof GAI.
23:57 Scott Galloway? Sorry about that.
23:59 Ed Elson? You know, you'd think that with, you talked about Altman's brand, he's sort of the prodigal son of tech and AI right now. You'd think that he would be able to go raise half billion dollars in the private markets from VCs. And I look at recent big rounds in the venture ecosystem right now, inflection AI, they just raised 1.3 billion dollars. Humane, which is that that secret AI startup that was started by these ex-Apple employees, they raised 100 million. And then you can say, okay, well, those are AI companies. But then you look at Adam Newman's company, Flow Carbon, which raised 350 million from Andreessen Horowitz. Wouldn't you think that he could go just raise this from a VC?
24:44 Ed Elson? Why is he going for a SPAC? And does the fact that he's doing that say anything about the venture market right now?
24:51 Scott Galloway? Because he's hoping the same thing that Branson and Palpatine hope, that investors in SPACs are really fucking stupid and will overpay for shares in a company at a valuation that VCs with analysts who have more than an IQ of 110 and don't have the same FOMO that retail investors have. I mean, essentially, the reason you take a company public is for liquidity, to raise capital for the company, to create a publicly traded stock that you can use for acquisitions. But you're absolutely right. A guy like Sam Altman should be able to raise a lot of money in the private market. But he's decided, I can raise money to better valuation, see above stupid retail investors. And also, retail investors, I don't mean to infantilize them, but generally speaking, the valuation you get in the public markets
25:34 Scott Galloway? because you have more, a broader pool of investors, because the markets in the US have greater regulatory scrutiny and more hurdles to go through. And typically, or historically, have investment banks that have tighter criteria or more stringent criteria, finer filters for taking a company public. You really got to kind of wonder about this thing because investment banks. Have no IPO volume. So if this thing had anything resembling a viable business model, Goldman and Morgan would be lined up. Goldman is taking Oddity Public, which is this kind of AI meets beauty. It's sort of the first example of a consumer product that is leveraging
26:14 Scott Galloway? AI for sort of moisturizers and makeup and coloring that is for a sample set of one and takes into account your unique features and comes up with specific, science-driven indications of makeup that, you know, make your cheekbones look better. It's like, if you had the world's greatest makeup artists, when I went on MSNBC, I'm telling you, I looked fantastic. I just looked fantastic. And it's because they have a makeup artist, a lady in a windowless room at 30 Rock who looks at me and says, okay, this guy's pretty fucking ugly. This is gonna take some time. And she literally, no joke, she pours liquid into this weird contraption and then she puts, you know those vests they put on you at the dentist when they're taking x-rays so you don't get leukemia when you're a little bit
26:59 Scott Galloway? older? She puts a vest on me like that. She tells everybody to stand back and then she sprays a hose of like, foundation on me. And I remember when I first went on TV, like, I don't know, it was like 20, right out of physical, like 28, I would go in and I would sit down and they kind of look at me and they'd be like, no, you're fine. Like, don't worry, you're fine. And now it's like, stand back. Anyways, but imagine you had AI, such that even if you're not going on MSNBC, you're gonna get the makeup you want. And they have this great brand called Imak Yash. So it's a cool company. It's out of Israel. They're going public. And guess who's taking them public? Goldman Sachs and Morgan Stanley.
27:39 Scott Galloway? Why? Because they can. And Goldman and Morgan's management or IPO approval committee are like, okay, let's look at this business. I mean, this business, it did, I think it did 220 million last year. This year it's gonna do 350. It's going like fucking crazy. It's profitable. The margins in makeup or in beauty are enormous. The margins in moats in brand equity of a beauty company with the power and scalability of technology, guess what? They're not doing us back. They're doing a traditional IPO. So the notion that that Sam couldn't get not only funding in the private market to get this $500 million, he probably could, but he'd have to give it more to the company. And the fact that Goldman or Morgan Stanley are
28:22 Scott Galloway? not taking this thing public, it's just not, it's just a negative looking forward indicator.
28:26 Ed Elson? Yeah. Like, I was looking at the deck of this SPAC, and there are no financial forecasts anywhere. The closest thing to a financial projection is this thing that they call illustrative unit economics, where they basically project out what cash flow might look like in 40 years. And the rest of it is a sort of hand wavy macro predictions on nuclear as a, as a global market. They look at the Inflation Reduction Act and domestic production of nuclear power plants and all this stuff, which is what leads me to assume, okay, this company has never made money.
28:59 Scott Galloway? He's got a gun to his head. He raised a SPAC. And that is, when the market was more favorable, someone is talented with his brand equity, goes to an investment bank and says, I'm doing a SPAC. And basically, SPAC says, here's $500 million. It's a publicly traded company. And this publicly traded company has one thing, a deal with you to go find an acquisition target that you think is a good company, and maybe you're involved in management, maybe you aren't. Here's $500 million, and the stock trades at 10 bucks. And the good news for investors is before, when he announces the acquisition, the owners of the SPAC get to decide whether they want to participate or they want their money back. And in the SPACs leading up to the end of 2022, you'd have redemption rates of 80, 90, 95%, where everyone said, no, you're overpaying for this shitty company that no respectable
29:42 Scott Galloway? investment bank would take public. We want our money back. And so then they have to go get staple on financing or debt financing and try and figure out a way to show up on closing and give the company that they're acquiring the money you said you'll pay for them. And then boom, overnight, just add water, that company is a publicly traded company. So some of the things I was talking about, the dynamics of opting for the public markets, thinking you can get a better valuation, that's all true. But in this case, it's probably that Sam's SPAC was running out of time. Because if you don't find a target within 24 months, you got to return the money and you lose, you lose some money, you know, 3, 5, 7 million bucks you spent on underwriting fees and legal fees. So he had a gun to his head. He probably found a target, probably was able to get, you know,
30:27 Scott Galloway? Decent mediocre terms, whatever you want to call it, and is going to put 500 million bucks in this company. If he doesn't have huge redemptions and he can probably get some staple on debt financing. And then overnight, it's a public company and it's going to be very interesting to see how the market reacts to this thing because there might be a lot of dentists and car wash owners that go, oh, Sam Altman, ChatGPT, nuclear, I'll buy the stock without looking at the numbers. And who knows, maybe, maybe this is the future. Maybe this company does grow into its valuation. But my, and I'm not a financial advisor, so I won't give financial advice other than don't get fucking near this thing.
31:07 Ed Elson? We'll be right back after the break with a look at a popular target for private equity.
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33:05 Ed Elson? We're back with Prof G Markets. Private equity firms typically make headlines for buying and selling large corporations. But in the past year or so, the industry has increasingly found itself circling more modest buyout targets, specifically mom and pop businesses. In the first quarter of 2023, small companies accounted for more than 61% of all US private equity deals. That's up from 50% in 2009. The primary focus is Main Street economy businesses, from local plumbers and dental practices to lumberyard owners and car washers. One owner of a small alarm installation firm in Kennesaw, Georgia, said he gets as many as 30 solicitations a month. In his words, "It's a nonstop barrage."
33:49 Ed Elson? Scott, private equity is the largest private asset class, $2.5 trillion in deal volume in 2022, and that was a slow year. And when I think of PE, I think of big SaaS leveraged buyouts or healthcare rollups. Why are these financial operators interested in these smaller regional businesses right now?
34:09 Scott Galloway? Well, one, they have to go further down the supply chain because the kind of big private companies that were really attractive assets have been bid up to such extraordinary levels that there's sort of two types of big private company, the ones where the owners just don't ever want to be public and aren't interested and don't return their calls or they've already been purchased. So in an era or decade of historically low interest rates, a ton of capital, there's been just a lot of acquisitions. It's not to say there's still not opportunity out there, there's just the opportunity set isn't as great because you have more PE firms with more capital. And the number of companies has grown, but it hasn't grown as fast as the capital. And at the same time, PE is known for value added. Smart guys, they're patient
34:50 Scott Galloway? capital, they're willing to come in and invest for five, seven, 10 years. And this is kind of the mother of all the whole is greater than the sum of its parts or scale play. And that is if you're a dental practice and you're doing three to five million dollars a year with three dentists, you know, you're spending 10% on marketing, operations, technology, which, you know, should be five or eight percent, or even staying at 10% just be much more effective. And you don't have someone in your office who really knows how to optimize the shit out of Google, or doesn't know, can't purchase software or CRM packages in bulk, or can't negotiate with suppliers, or, or maybe doesn't have best practices around
35:29 Scott Galloway? patient management, or revenue optimization, or new technologies. So if you roll up, you know, there's small kind of dental practices with two or three. My dentist, or my old dentist in Delray was a guy named Craig Spodak, and he had this amazing operation. And like most dentists, his dad was a dentist, he ran the company, works really hard. Ton of innovation, I would bet he does, I don't know, 15, 15 to 30 million dollars. It's a big operation. And the PE guys come in and say, okay, if we roll this up, if we get enough scale, one, we can access the public markets. And a private practice like that trades at maybe five to eight times EBITDA. But if we get this public, it trades at 12 times. So there's, it's accretive
36:13 Scott Galloway? there. And two, we're going to take, you know, 20 of these acquisitions that equal two or 300 million, and we're going to centralize a lot of things that you're not great at. You're great at dentistry, you're great at relationship management, you're great at marketing in the local area, but technology, operations, negotiating with suppliers, HR practices, we're going to, we're going to create one backend across everybody, and for less money or a lower percentage of revenues, do a better job. And then we might be able to access the public markets or another private equity buyer that doesn't want to buy a 20 or 30 million dollar dental practice, but loves the idea of buying. Ten or twenty of these things that are doing three hundred million and growing eight
36:56 Scott Galloway? or ten percent a year, that's a nice company. It's not dissimilar from what kind of Martin Sorrell pioneered in the eighties when he went around and bought all of these services firms known as ad agencies and smoothed out the variability and created a lot of synergy on the back end around operations and realized that the key was the relationships that these individual agencies had with clients. But the back end, some of the access to capital, HR, infrastructure, whatever it is, created assets that were now investment grade, which before were just small businesses. And they're doing this across a bunch of fragmented industries. I think you mentioned car washes and plumbing, but this makes a lot of sense. And I think there's been some big successes here. It's good for the dentist.
37:40 Scott Galloway? He or she gets possibly access to some liquidity and maybe an increase in the value of their practice because they have now, you know, three or five percent of a bigger asset that might go public. They get operational help, they get business advice. So, you know, this is an example of capitalism at work. I don't imagine there aren't, you know, some horror stories where they guys sell these things and they hate the company and they never get the liquidity they'd hope. And they also give up some control because they're no longer kind of in charge, if you will. But I think this is a super interesting strategy and I think you're going to see it across multiple industries.
38:15 Ed Elson? What are your thoughts on the notion that these private equity firms are actually net negative in terms of value added? Because, I mean, private equity just as an industry has received so much criticism in the past, particularly from people on the left. I mean, we mentioned Elizabeth Warren earlier in this episode. She's described them as vampires, particularly because of this dynamic where the PE firm will go to a distressed company, they'll load them up with debt. And then, you know, whether or not the company succeeds, maybe it goes into bankruptcy, but the firm still ends up fine because it's taking its two percent in management fees. And then, in addition to that, there's this other... You know, truthful trope, which is that the main strategy across most PE firms is
38:58 Ed Elson? just laying people off. And Mia had this interesting data point, which is that the average PE acquired company has a 13% headcount reduction two years after the buyout. So do you think that there's a possibility that this secular shift into Main Street economy, mom and pop businesses could harm those businesses and in addition substantially reduce employment opportunities on Main Street?
39:24 Scott Galloway? Yeah, I think that's mostly bullshit. Look, private equity is an asset class where these individuals have raised a lot of capital. The majority, I know a lot of entrepreneurs who sold to private equity. And the majority of those entrepreneurs like their partners, that's how they refer to them. And they got a bunch of money and they de-risked and they took a bunch of money off the table and they still kept a big interest in the new, you know, part of a larger entity. And if a private equity firm borrows enough money and goes into default on it, they're not going to be able to raise more money. So the notion that their play is just to lay tons of debt on the thing and then declare bankruptcy and move on to the next thing, that's just, that's just not true. Their strategy is to come into a company, grow it or cut costs or both, and then take it public or sell it for more money based
40:09 Scott Galloway? on business improvement. In terms of coming in and laying off employees, look, I think capitalism is about applying capital to its greatest use. And if a company can be run at the same level of profit with lower employment, you know, that is going to happen. It's just a question of when it happens. And I would argue it's better to do it sooner rather than later. Now, having said that, having said that, I think private equity firms have weaponized government, pay lower taxes. I think that's ridiculous. I hope someday someone loves me as much as Senator Sinema loves private equity. They get to pay essentially Long-term capital gains are lower taxes on what is a commission. They get a 20% carried interest, which is commission. Whereas if I sell copiers, the commission I get is taxable at a higher rate.
40:54 Scott Galloway? So the wealthiest people in America, private equity players, pay lower taxes. That makes no fucking sense. I think there's all sorts of things that are screwed up about the system as it relates to private equity players. But if Senator Warren really wants to add value, she should do her fucking job and raise taxes on the wealthy instead of just these far-left senators who want to demonize private equity and billionaires and tax rates. It's like, well, okay, it's too bad we don't have senators who can restore equity to our tax structure. Oh, that's you, Senator. That's you. They controlled, we Democrats controlled all three houses, the White House, Congress, and Senate, and we still couldn't figure out a way to increase the taxes of the wealthiest people in the world.
41:38 Scott Galloway? We still couldn't figure out a way for the wealthy not to weaponize tax loopholes. We still couldn't figure out a way to not have Kristin's cinema, Senator Cinema, like literally bend us over in exchange for a million dollars in donations from private equity people in a state that does not register any benefit from private equity, Arizona. So, yeah, I agree, Senator Warren. You haven't done your fucking job. What a rant, Ed. What a rant. That's it. That's it. This brand of meth is the right brand, whatever I'm on right now. Anyways, where am I?
42:13 Ed Elson? Well, we're wrapping it up now. So, before we get to the week ahead and your prediction, Scott, let's listen to the prediction you made exactly one year ago in our very first markets episode.
42:24 Scott Galloway? My prediction, my prediction, and I have been wrong. Anytime I use the word Tesla, I'm usually wrong. This company is still the most overvalued company in the world, and the market is looking for an excuse to take this company to the woodshed. And I think it's going to find it in the fact that the CEO is doing pretty much everything but anything to do with Tesla. He's managed to piss off the far-left by saying that the Democratic Party is hateful, and he's also managed to piss off the spokesperson for the right, Donald Trump. So I think all of this is going to take a toll, and at some point, every stock here is getting beaten up pretty badly. And Tesla's actually held up. It's down 30 or 40%. So my prediction, my prediction, and again, don't trade on this because I usually get it wrong about Tesla.
43:11 Ed Elson? Pain.
43:11 Scott Galloway? That's not fair. That's not, that's not, that's not loving, Ed.
43:16 Ed Elson? Well, actually it is because, I mean, well, okay, let's make the argument for you, which is it got cut in half six months later.
43:23 Scott Galloway? Yeah.
43:23 Ed Elson? But then it came back. So it's, it's back around where it was. I mean, I'm looking at a year ago, is it 240? December, it's down to close to 100. So more than cut in half. And now it's at 275.
43:37 Scott Galloway? You didn't bring up the prediction when it was down at 100, did you?
43:39 Ed Elson? I bet we did. I bet you don't remember.
43:41 Scott Galloway? So I was very right and now I'm just meh. I was very right and now I'm meh. Yeah. My emotion, I, my emotion clouds me here. I don't, I have trouble. I can't see clearly. But I appreciate you bringing that up. Are we going to do this every week? We're going to revisit our predictions.
43:55 Ed Elson? Hell yeah. To hold ourselves accountable, hold you accountable.
43:58 Scott Galloway? I like that. I like that.
44:02 Ed Elson? All right, Scott, let's take a look at the week ahead. We've got earnings from Bank of America, Morgan Stanley, Goldman Sachs, US Bank, Charles Schwab, Netflix and Tesla. Scott, any predictions?
44:16 Scott Galloway? My prediction is the next kind of IPO that is going to reinforce the notion that the IPO market is coming back is this firm called Oddity. It's an Israeli-based beauty company. The numbers look fantastic and I just love the peanut butter and chocolate combination of a consumer company with great brands that integrates well with technology, specifically kind of AI-driven mass customization. I think Goldman and Morgan are taking this thing out. I think this thing's going to get a pop.
44:46 Scott Galloway? This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavert and Catherine Dillon. Miel Severio is our research lead and Tru Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take, fresh take on markets every Monday.
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