Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: Exxon Buys Pioneer, Private Credit, and Ireland’s Sovereign Wealth Fund About this episode This week on Prof G Markets, Scott shares his thoughts on Exxon’s $60 billion acquisition of Pioneer. He then explains why private credit firms are essentially marketing organizations, and why you’re better off investing in index funds. Scott also takes a look at Ireland’s new sovereign wealth fund and proposes a global minimum corporate tax.
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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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1:32 Scott Galloway? This week's number, 2,749 pounds. That's how much the winning pumpkin weighed this year at the World Championship Pumpkin Wayoff, setting a new world record. My girlfriend said she was coming to our Halloween party dressed as our sex life. She didn't come.
1:59 Scott Galloway? Welcome to Prop G Markets. Today, we're discussing Exxon's acquisition of Pioneer. The private credit industry and Ireland's new sovereign wealth fund, they should be calling it the tax avoidance wealth fund. Here with the news is Prop G media analyst Ed Elson. Ed, what is going on?
2:16 Ed Elson? Not much, Scott. I'm in London, but I've yet to see you. We should hang out this weekend.
2:20 Scott Galloway? I would, but I don't enjoy your company. The good news is I won't be hanging out with you. The bad news is I haven't also, I haven't hung out with Caroline and Mia, who are also here doing this like hot girl, summer 55 and rainy. Welcome to London. Just so you guys know, the sun went behind a cloud yesterday. It'll be out again in May. Ed, why are you here?
2:40 Ed Elson? I was supposed to go to a wedding in Lebanon, and this was the easiest way to do it. And then it got canceled because of the war. So it's actually pretty intense, but.
2:48 Scott Galloway? A wedding in Lebanon?
2:49 Ed Elson? Yeah.
2:50 Scott Galloway? Wow, you're so metropolitan. And what are you going to do while you're here?
2:53 Ed Elson? Well, I don't know. Now I've got to make some plans. I'd love to go see a Chelsea game, but I've been scrambling to get tickets. Maybe you can help me out.
3:00 Scott Galloway? Who are they playing?
3:00 Ed Elson? You should know this. This is Arsenal this weekend.
3:02 Scott Galloway? It's Arsenal this weekend?
3:04 Ed Elson? Yes, sir. It's gonna be huge.
3:06 Scott Galloway? Is it at Chelsea?
3:06 Ed Elson? At Chelsea. You gotta go.
3:08 Scott Galloway? Yeah, no, I'm definitely going to be there. By the way, I was at, I was at the game last weekend. Did you see that? Martinelli, 89th minute. Hello, beat Man City.
3:17 Ed Elson? Yeah, impressive. I saw your signature selfie video where you filmed the whole crowd, and then you filmed yourself right at the end.
3:25 Scott Galloway? Look at me. Yeah, I am. Well, that's what they want. They, I remember reading that you get much greater engagement when you have yourself in, which fits well to my narcissism. Anyways.
3:35 Ed Elson? Is that actually why you did that?
3:36 Scott Galloway? I've done it all the time. They say that just taking mood shots of your environment gets about a third of the engagement is when they see that you're there. I have this planned out. So just to do a quick digression, I imagine my death. I envision my death a lot. I know the drugs, the music, the people, the location. I'm planning it out. One of the things I'm going to do is I want a series of videos playing all the time. So, and I love that Apple thing where they set some cheesy music to, you know, your holiday in Greece or whatever. And somehow they figured out to find all the photos from you in Greece. I think that's my favorite use of AI. But yeah, I was trying to have either me or a little weirded out about putting my kids in that stuff because I wonder if they're going to have facial recognition and then get kidnapped by somebody at some point. But anyways, fuck this shit. Get on with the headlines, Ed.
4:23 Ed Elson? Let's start with our weekly review of market vitals.
4:32 Ed Elson? The S and P 500 rose, the dollar was stable, Bitcoin fell, and the yield on 10-year Treasury has declined. Shifting to the headlines. The Consumer Price Index showed inflation was stable in September at 3.7% year over year, the same as the month before. Utah filed a lawsuit against TikTok accusing the app of baiting children into addictive and harmful social media habits. Disney is raising prices at its theme parks. Disneyland tickets for popular days are increasing 8%, while five-day passes are increasing nearly 16%. Goldman Sachs is selling Greensky, the consumer lending firm it acquired just two years ago for $1.7 billion. The sale price was not disclosed, but Goldman will incur an immediate loss from the transaction.
5:16 Ed Elson? And finally, Birkenstock was priced to go public at $46 per share, valuing the company at $8.6 billion. The stock opened, however, at $41 per share and closed its first day of trading down more than 12%. Scott, thoughts on this?
5:33 Scott Galloway? My sense is inflation is tracking downwards and we're going to see... There was this interesting data that Mia found, that if you look at the delta between the number of people pursuing a job and the number of job openings, when there's a lot more job seekers than job openings, inflation is usually very low. And then when there's more job openings than job seekers, inflation has been very high. And that delta is narrowing, and that is there are fewer and fewer... It was about 1.5 job openings for every job seeker over the last six or 12 months, and it's narrowing, which says that inflation should come down. And we've always been very, the term is dovish, hawkish on inflation. I think it's going to continue to come down. I think their target is 2.5%. They're not that far from it at 3.7%.
6:16 Scott Galloway? Utah filing a lawsuit against TikTok. Something tells me the folks in Beijing are still going to sleep tonight. You know, the Mormons versus the Chinese, that's going to, that's going to be an interesting battle. It's mostly symbolic, but the thing that just blew me away was the data you found that TikTok is growing as fast as growing and that if it maintains this growth rate, by next year it'll be a bigger business than Meta. And within three years, I think it could be a bigger business than Alphabet. And while all of these strikes and all this conversation around media and misinformation, the elephant marching through... The camp is TikTok and that is it's just, it's just growing. I mean, I'm just blown away. It could be the biggest media company in the world in three to five years.
7:01 Scott Galloway? Disney raising prices at its theme parks reinforces the notion that its parks are singular. They have incredible pricing power. I would argue that raising five day passes by 16% would be better called a mental illness tax, but this like, I think the parks are the future. They've got more pricing power there than any, any of their other businesses and people are spending more money on experiences.
7:25 Ed Elson? It's also pretty interesting that actually the cheapest ticket didn't change in price, but then the most expensive ticket, probably the one that you get, it's called the Inspire Magic Key Pass. You get access to all the special stuff. That one went up 40%.
7:38 Scott Galloway? They're absolutely taking advantage of what is, you know, crazy income inequality. And I had a couple of thoughts and I had the same thought both at Universal Hollywood, where I took my boys and Disney. And that is they're just not charging enough money. There's too many people here. And supposedly the park attendance was way down in Orlando this summer. And I wonder if that's a little bit of a COVID hangover or the spending orgy is coming to an end, or maybe people are going, I thought maybe more people are going to Europe because Europe's been closed for the last couple of summers, or maybe because Orlando's now like 700 degrees during the summer. But I just remember there's clearly more demand than supply here. Every time I've been, it's just been, it just feels like a firehouse if there's so many people there. Goldman selling Greensky, the firm it acquired just two years ago. You're like, they want out of the business. Their adventures in consumer
8:23 Scott Galloway? banking are over. I give David Solomon and the leadership there some credit for trying to innovate. And then the most important thing about innovation that isn't working is you perform infanticide on it and you pull the plug. So, you know, if I were on the board there, I don't think I'd be angry at management here. I think they've got to try stuff like this. But the big news of the week was Birkenstock. And I knew something was up when my guy at Goldman called me and said, I can get you shares in Birkenstock. I'm like, if you're calling me and telling me I can get shares in Birkenstock? That's a really negative forward looking indicator. It opened at 41 bucks a share despite the fact that it was priced at 46. So it's a broken IPO and it was first date down more than 12%. So this is a busted IPO. And I think there's a larger story here.
9:08 Scott Galloway? And that is the IPO market has specifically become the last stop on the pump and dump train. It used to be the place where you'd have to go to maintain growth and get the kind of capital you needed to maintain to become a big company. And two thirds of companies used to be profitable. Now it's less than a third. And the company was sort of had already kind of been through Navy SEAL training and was strong and fit and ready for the big time. And everything has changed. One, private companies can find as much capital as they need in the private markets. VC firms did so well through the aughts and the teens that they grew their funds from 300 million to 5, 7 and 8 billion dollars. So they have a ton of capital to throw at these companies in the private market.
9:50 Scott Galloway? And also Don Valentine spoke at my class in 1992 in business school and they asked him what his biggest regret was. And he said- Can you just explain who Don Valentine is? Don Valentine, I think was the founding partner of Sequoia Capital. I think he passed away a few years ago, but Sequoia, kind of this iconic VC firm. And he said, the biggest mistake they made was not holding on to shares for longer. They had backed Cisco, Amazon, Yahoo, a bunch of, a bunch of the big players, Google, I think. And so what they've done, the VC community's done is they do hold on to the shares longer. Specifically, as long as the firm continues to grow in value, they're like, why go public? Oh, you want liquidity? Fine, I'll buy some of the founder shares. Oh, you need more capital? No problem. We can put 2, 3, 500 million dollars to work. No problem. So when do they go public?
10:35 Scott Galloway? One, when they think the jig is up and this thing makes no sense and nobody in the private markets wants to continue to fund this bag of shit, specifically WeWork or Blue Apron or Rent the Runway or Allbirds. Or we think that value's topped out and we want to perform kind of a head fake and jazz hands and maybe we'll do a, a small round to convince people that, oh yeah, no, it really is worth this much and hope that the greatest fool theory kicks in and retail investors buy this thing. And what do we see? We see IPOs are dramatically underperforming the S and P because they have basically become the wasteland or the septic tank for private market investors that want to dump the bag,
11:19 Scott Galloway? or they think that the game is over and the value creation is over. And the result is that institutions and private capital and very wealthy individuals capture all the upside. And the guy or gal on Main Street no longer gets to buy Amazon or Netflix at the IPO. And the amount of capital these companies are raising is just extraordinary in the private market. SpaceX would have been a great way to acquire wealth or build wealth. But the private market said, no, this company is doing great. We want to register or capture all the gains ourselves. And they have raised $9.5 billion in the private markets. So companies are no longer going public. They wait until there's no more value to be created there, or they just want to dump. And the result is private markets have just taken over.
12:05 Scott Galloway? And as always, it's the little guy or the little gal that gets hurt here. And Birkenstock, the private equity firm, bought at $4 billion or 4.2, and they want it out. And they wanted to, they used a series of false signals. They constrict supply to create the illusion of scarcity. Companies used to issue 25% of their shares in an IPO. Now, on average, it's 12% to create this illusion of scarcity. And they usually do stuff to try and signal value. In this case, they said LVMH is committing to buying 300 million in shares. And they've just priced these things really aggressively because the private equity firms want to dump it.
12:41 Ed Elson? I think the craziest statistic from the research that we were doing for No Mercy last week was this concept of profitability at the IPO. The craziest stat, in 1980, eight out of 10 VC-backed IPOs were profitable. And then in 2021, the number was 1 in 10. And then last year, it was literally zero. Not a single VC-backed IPO was profitable when it went public. The thing that's interesting about Birkenstock is that you've had quite a change of tune here on this company.
13:19 Ed Elson? They're growing, they are profitable. It's likely that they just severely overpriced the IPO. You know, they price it around nearly seven times sales. I think the value has slightly come back down to earth. It's now trading at around five times 2022 annual sales. So I guess the question that I would pose to you is like, what changed for you? Was it just this sort of structural thing that we've been seeing in the IPO market? Where you had Arm and Klaviyo and Instacart underperforming? And then you sort of realize this trend and then you get that call from your Goldman guy who tells you, hey, do you want in? Or was there something specifically about Birkenstock that got you more bearish on the stock?
14:03 Scott Galloway? I think it's a great company. It's well managed. I just thought it was overvalued. People looked at Birkenstock and thought, great company. You know, probably worth eight billion and they're pricing it at 9.2. And the people who did the math said, no, we'll pass on this one. And they were right. And when a company closes at 12% below where it's priced, that's kind of like a no-no. But I mean, that's not even beginning to talk about the SPAC market. Where you've had 300 SPACs and 10 of them are trading above their listing price. Meaning that if you bought into the SPAC phenomenon, there's a 97% chance you've incurred capital destruction. And then, I mean, the IPO, people don't realize just how shitty the IPO market. I mean, some of these consumer IPO companies, Allbirds, another shoe company,
14:46 Scott Galloway? it's off 96% since its IPO. What about Rent the Runway? That's another cute one, right? Rent a DVF dress, great model, good, and think, well, look at the actual numbers here. This business makes no fucking sense as it scales. It just loses more money. That's a, that's a bankruptcy barreling towards us unless an Urban Outfitters or a Gap buys it for its customer list. So in sum, the thaw in the IPO market has happened. There are some good names getting out there. While their performance has been lackluster, they've raised a lot of capital. The IPO market, I would argue, is back, at least cyclically. But I think you'd have to argue as a mechanism for investors to build wealth.
15:29 Scott Galloway? No, as always, it's being increasingly captured by a small number of people and institutions.
15:35 Ed Elson? We'll be right back after the break with a look at the oil market.
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18:00 Ed Elson? We're back with Prof G Markets. ExxonMobil has agreed to buy Pioneer Natural Resources, a shale oil producer, for $60 billion. That's its largest acquisition since 1999, when the company was formed through a merger with Exxon and Mobil. With 850,000 acres, Pioneer is the largest oil producer in America's Permian Basin, and that deal will more than double Exxon's footprint and production in the area. Exxon shares dropped 4% on the news, and Pioneer rose 0.6%. So, Scott, this is a pretty big bet on oil, and meanwhile, you have energy companies like BP, which are actually trying to cut down their oil production. So, let's just start with this.
18:45 Ed Elson? Is this the right bet?
18:46 Scott Galloway? Fossil fuels are going to be around for a long time. For all the excitement around EVs, I think electric vehicles make up 2% of the automobile market right now. There's nothing that comes close to the efficiency or the arbitrage of taking fossil fuels and converting them into petroleum or heat or what have you. All of the jazz hands are on a concern for the environment. It's real, but it isn't impacting consumption of oil so far. I mean, you don't remember this, you're too young for this, but British Petroleum changed their name to BP, and their ad campaign for several years was "Beyond Petroleum."
19:23 Speaker 03 Is it possible to drive a car and still have a clean environment? To refine a cleaner petrol? Can solar power become mainstream? Could business go further and be a force for good? Can 100,000 people in 100 countries come together to build a new brand of progress for the world? We think so. And now, BP, Amoco, Arco, and Castrol have come together to try. Beyond Petroleum, BP.
19:51 Scott Galloway? I mean, these are the biggest polluters in history, and they could, I mean, it's pretty clear these people don't give a flying fuck about the environment, and they believe that, okay, let's just put out commercials signaling that we care. The bet on US oil production is probably a smart bet, because it starches out the political instability that these companies have to face. Can you imagine if you have big oil fields in Russia, or try to manage what, you know, oil fields in Africa? I mean, unless you're working with Norway... Or Scotland, which I think has huge oil reserves. I mean, most of the oil is sitting under the US, Russia, the Kingdom, and then a bunch of really unstable places outside of Norway. You know, Venezuela? Would you really want to bet a lot of your shareholders' money
20:37 Scott Galloway? on a relationship with the Venezuelan government? So, yeah, yeah, it's strictly distinctive. Distinctive the climate change and your grandchildren are likely going to have to migrate to higher ground for whatever reason, or constantly be putting on sunblock. Distinctive that, yeah, it's a good move.
20:54 Ed Elson? And then just on the deal itself. So they bought Pioneer for $253 per share, which is 18% higher than the closing price pre the acquisition announcement. And 18% is actually quite low as far as acquisition premiums go. So in 2021, the average premium for public M&A was 37%. And then when you look at the past two decades, the average is similar. It's around 36%, and this is half of that. Do you have any insights on why they paid that amount? But also, just more generally, how the terms of these gigantic public M&A transactions are actually determined?
21:34 Scott Galloway? Companies aren't sold, they're bought. And that is the buyer kind of, to a certain extent, dictates the price. And that is, at the end of the day, a company is worth what someone is willing to pay for it. So the issue in this industry is, I bet, there are very tight benchmarks that these companies trade between X and Y multiple. And then they probably said, there's synergy here. You'll do better owning Exxon stock. We'll give you a small premium. This isn't a strategic purchase. This is a scale purchase. There isn't a unique technology here. There isn't a unique brand. There's not a lot of IP here. And my guess is firms of this size in this industry trade between a pretty tight multiple. So they weren't going to pay them a 60% multiple,
22:16 Scott Galloway? hoping that something about Exxon would magically turn this company into a much more scalable company or a technology that they could scale. So when to sell a company? And I'll speak as someone who's sold small companies and has been on the board of companies when we sell, when they're bigger. Your natural instincts, when the company is doing really well, is not to sell, is to hold on. And then when things look shitty, or tough, or really challenging, then your instincts say sell. And what I have experienced is that you want to ignore your emotions and do the opposite. Because acquirers are smart. And if your company is really pumping, they'll walk in the door, and they'll smell it. And they'll go, wow, this company is doing really well. And you don't need to sell. Essentially, you never want to be a
23:01 Scott Galloway? forced buyer. So when your company is doing well, you don't need to sell. And then you get an unsolicited inbound offer. That's the time to start a process. And what you do is the following. You hire an investment bank, or a good deal attorney. You make overtures to a buyer community, or a target list of potential acquirers, say, half a dozen to a dozen. Send them a letter and saying, we have a credible inbound offer. The truth always has a nice ring to it. We are interested in talking to you. Would you be interested in talking to us? Do you want to speak now, or forever hold your peace? And ideally, the key to getting a better price is multiple bidders, full stop. And that's the only way you incrementally get them up to making an irrational offer. And that's what every seller
23:42 Scott Galloway? wants, is they want their company to be purchased for an irrational multiple. When I sold my stake in Profit in 2002, I think, it was a strategy firm that was doing well, growing well, but it was a services company. We sold, I think, at a valuation of 28 million on 10 million in revenues, 2.8. So that was fine. But market conditions will always trump individual performance. Three years previous to that, in 99, I was offered 55 million, when the company was doing 5 million in revenue, because the market was going crazy. So you want to look at atmospherics. How was the market conditions? Is the company doing well? Do we have a credible inbound offer? Could we potentially get multiple bidders in the ring? And then when I sold L2, it was doing...
24:27 Scott Galloway? About 20 million in revenue. We had a credible inbound offer, went out to a variety of bidders, got three letters of intent, got one up to eight times revenues. And then that company bought the number two bidder and then the third company withdrew. So all of a sudden I was negotiating unilaterally, which is a place you don't want to be in. So I tried to convince myself to be a bit of a sociopath and pretend that I had multiple bidders and we ended up selling for eight times revenue, which is very, very healthy for what is kind of an analytics company at the end of the day. But in some companies are bought, they're not sold. You want multiple bidders, you want a credible inbound opportunity, you want to ignore your
25:10 Scott Galloway? instincts and if you're interested in a liquidity event, sell when the company's doing really well because acquirers will sense that as well.
25:26 Ed Elson? Private equity giants KKR and Carlyle are launching two new private credit funds that unlike most private credit funds will not charge a carry fee. Now, as a reminder, carry is the term for the portion of profits firms take on their investment returns. So in private equity, the standard carry rate is 20% and in private credit, it's between 10 and 15%. But now KKR and Carlyle are not taking any carry. They will still charge a management fee, though no specific numbers have been disclosed. But this move to eliminate carry is somewhat of a signal that private credit is having to sweeten its terms to win over investors. So Scott, what does this move say to you about the now one and a half trillion dollar private credit industry?
26:09 Scott Galloway? What you have with alternative investments is that it is a very competitive environment. When I first moved to New York in 2000, I met a bunch of people in publishing. I met a bunch of people in the hedge fund industry and then a bunch of entrepreneurs. My friends in the publishing industry, hardworking, really smart. Most of them are, you know, real estate brokers now or licking their wounds or trying to reinvent themselves or trying to, I mean, they've just got, they've just been kicked in the nuts over and over. My really smart, hardworking friends in alternative investments.
26:44 Scott Galloway? Many of them through kind of the, kind of call it 2002 to 2016, 17, were no joke, making 10 to 20 million dollars a year. I think the period, the 15-year period between 2000 and 2015 will be seen as an absolutely historic period where so few people made so much money. Alternative investments was basically, as far as I can tell, a marketing, basically genius marketing. And that was rich people in institutions like to believe they have access to something special. So we find these incredibly smart people who have special insights, special tools, PhDs, high-speed trading systems, and we invest there. And a few of them do really well.
27:27 Scott Galloway? And then they raise a shit ton of capital and usually over time their fees or the returns normalize. But because you're under the impression you're getting something, access to something unique or different, you're willing to pay 2% of your investment every year in the form of fees and then give up 20% of the upside. And if you looked at the performance of these things over the last 20 years, they would be best described as bad, but expensive. Before costs and fees, active managers on average beat their benchmarks by five basis points. After costs and fees, they underperform the benchmarks. And get this, over a 20-year period, 95% of large-cap actively managed funds have underperformed their benchmark.
28:08 Scott Galloway? So if you look at what's happened over the last 20 years, it's been really kind of the land of the giants. When we talked to Josh Brown, he basically showed that the biggest companies in the biggest decile outperformed everybody else. But no one's going to pay a manager 2 and 20 to buy Apple and Nvidia. So they're trying to find unique alpha, which underperforms the market, and yet they're charging more. And so people have been withdrawing their money. Out of these actively managed funds and putting them into low cost passive funds. And effectively here KKR and Carlyle have said, we want into the Amazon slash Vanguard game. And that is, we want massive, we're going to go for the Walmart Vanguard Amazon strategy.
28:51 Scott Galloway? We're going to create so much AUM that even if we don't take upside, we just charge small fees. There's a really good business here and we should be able to aggregate more and more capital because our returns will be higher because we're not taking 20% of the upside. And we'll have companies worth a lot because the consistency of fees, especially if you're growing your AUM regularly, creates a lot of enterprise value. In some, unless you're offering a real specific niche product that I'm doing buyouts or private middle market credit and biotech in Spain, and I know everything about it, it's going to be very hard to maintain the fees that alternative investment managers have been able to get away with because the bottom line is it was all jazz hands, as we like to say.
29:36 Scott Galloway? It was all the illusion of something differentiated and special when the vast majority of investors would have been much better off just buying SPY or putting their money in Vanguard. And some, in some, as it relates to alternative investments, the jig is up and this deal represents that.
29:51 Ed Elson? It's so interesting because in the past 12 months or so, everyone's been calling this the golden age of private credit. I mean, that's all I've been seeing. It's become this massive industry. We saw the largest private credit deal ever this year. And I feel like that's a result of this higher interest rate environment where fixed income has become more attractive. And you know, you could go into public debt, you could go into junk bonds, or you could go into that sort of sexier, more exclusive, higher return category that is private credit. But this news is basically suggesting that that sector maybe isn't so sexy anymore. And I'm wondering, one, why that is, maybe it's just the returns haven't, you know, been up to investors appetite.
30:35 Ed Elson? But two, do you think that this golden age of private credit that everyone's been talking about has come and gone, it's come to an end?
30:42 Scott Galloway? I would imagine this market's going to do well, this product's going to do well. But I mean, just an example, managers with more than $100 million in assets under management spent an average of 11% of their fees on marketing. And the Vanguard Group, which has almost eight trillion in AUM, spent under 100 million on advertising and it only charges, get this. 0.08%, their average fee is eight bips versus what is the typical hedge fund model is 200 bips a year plus 20% of the upside. And just going back to advertising, Vanguard's only spending 1.6% of their fees on advertising. And I love that Jack Bogle, who's the founder of Vanguard, I love the statement, don't look
31:26 Scott Galloway? for the needle in the haystack, just buy the haystack. And again, this goes back to a fundamental lesson. You think, well, it's only 2%, I can manage that. Or my brokers only charge me 1% of fees. The difference between 0.08% and 1% of your fees, when over time you have the same returns, and there's a lot of evidence showing that your buddy down the street who has insight and research from Morgan Stanley or whatever, is not capable of picking stocks any better than an index fund, you're going to lose a third of your returns to fees. And so what Jack Bogle said is, don't look for the needle in the haystack, just buy the haystack.
32:05 Scott Galloway? And again, our advice to people is if you can't resist, and I fall into this trap, sure, buy an individual stock, learn about it, watch it, fine. But take the majority of your capital and put it in low cost ETFs, like the kind that Vanguard or Schwab or Fidelity offer. Because at the end of the day, one, you're going to spend too much time looking at your phone, and two, you want to let time take over. And these guys outperform, outperform alternative investments. Ed, the jig is up. The jig is up.
32:39 Ed Elson? We'll be right back after the break with a look at Ireland's Sovereign Wealth Fund.
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34:43 Ed Elson? We're back with Prof G Markets. Ireland is creating a new sovereign wealth fund called the Future Ireland Fund. Now, in most cases, a sovereign wealth fund is created when commodity prices rise, leading to some large, unexpected windfall. But in Ireland's case, the source of income is quite different. The source of income for Ireland is specifically US tech companies. There are now 950 US businesses operating in Ireland, including Apple, Meta, Google, Amazon, and Pfizer. And they're there for one reason. Taxes. Ireland has some of the most favorable corporate tax laws in the world. And as a result, it's been able to collect huge tax revenues. In the past eight years, its corporate tax income has tripled.
35:28 Ed Elson? And last year it raked in $24 billion. Researchers say $10 to $15 billion of that should have been collected by the US. Nevertheless, Ireland will now use those profits to invest in its own sovereign wealth fund, which the government estimates could hit $100 billion in assets by the next decade. Scott, reactions to this news?
35:49 Scott Galloway? Ireland has been smart. They've been deft here. Whoever's been managing this on behalf of the government has created this this great business of essentially helping large multinationals engage in tax avoidance. And what they do is very straightforward. You create an Irish subsidiary. Apple creates, they call it Apple International, and it's in Dublin, Ireland. And they give that entity all of the intellectual property of Apple. And then Apple International will lease or rent or license back that IP to their American unit for, call it, $50 billion a year, thereby suppressing profits in a high tax domain and increasing profits in a low tax domain. And Ireland says, all right, we'll charge you a lot less than the US would charge on those profits.
36:34 Scott Galloway? And essentially, we have just pure tax avoidance. And instead of funding roads and schools in Cincinnati, we're funding them in Dublin. And now they're creating, you know, the Sovereign Wealth Fund. It should be called the Multinational Tax Avoidance Fund because that's really where it's come. People aren't investing in Ireland because of a unique IP. Or, you know, there are some customer service centers there. Ireland actually has some very good universities, but this is just simply a function of them skimming off the top of their ability to attract and engage and facilitate tax avoidance. So they're not doing anything illegal. The blame here rests with our elected officials, who are not only whores, but they're cheap whores. And when these, the Better Business Bureau or the Chamber of Commerce
37:18 Scott Galloway? or individual companies throw a little bit of money at them, they're willing to tolerate what is essentially a regressive tax structure, where there are five companies in the Fortune 100 that don't pay any taxes. And so I find this is just a, you know, good for Ireland, but it's a symptom of a broader problem. And that is, we need an alternative minimum tax for multinationals across all borders and a cross-border agreement. Otherwise, we're slowly but surely not going to be able to fund. Our Navy, Social Security, you know, pre-K, food stamps, you know, Medicaid, on and on. But, you know, I'm sure there's a lot of awesome new bridges and roads in Dublin. Yippee!
37:59 Ed Elson? Well, the good news is, you know, you mentioned that global minimum tax, that's already about to happen. And it was because of Yellen and Biden pushing for it. And the, there's now a global minimum tax rate that will go into effect next year of 15%. It was signed by 136 countries. Ireland did not sign it until it was threatened to be punished by all these other countries if it didn't sign it, and then it did sign it. So that will go into effect next year. That intellectual property tax law that you were talking about is still in effect, but they have now had to raise that tax rate in accordance with the new law. And they're going to start charging 15%. Do you think that this solves
38:41 Ed Elson? everything? Do you think that now that if we have a flat 15% corporate tax rate across the entire world, that we'll finally start repatriating the profits that the US actually deserves in the US?
38:54 Scott Galloway? Oh, it's definitely a step in the right direction. And Biden and Secretary Yellen deserve just a tremendous amount of credit for this. It is absolutely the right strategy. And by the way, it wasn't easy to get all of these folks on the same page. And as you referenced, required us to actually threaten and muscle Ireland into this. Because if you don't have everyone participate, it becomes a race to the bottom. And everyone just says, okay, we're going to incorporate in the Isle of Man or in, you know, wherever. So I think it's a great thing. I think it represents cross-border cooperation for the benefit of all of these countries' public coffers. I think it should be 25%. I mean, 15%. I would bet your tax rate's higher than 15%, Ed. If you're going to let these guys weaponize
39:36 Scott Galloway? government, you might as well get rid of corporate taxes and just have some sort of value-added tax or something like that. But I think it should be closer to 25 or in 30%. I think there's evidence that shows when you have tax rates that are this low, corporations are tempted not to reinvest the money. They distribute it out to shareholders, recognizing that at some point, they might have to pay higher taxes. So it's a good time to distribute it out to shareholders, which results in a decline in R and D and CapEx, which creates lower growth and lower And less innovation in our economy.
40:06 Ed Elson? Yeah, it's funny you mentioned that 15% is too low because, you know, people love Ireland for the corporate tax rate because the current corporate tax rate is 12 and a half percent. So, I mean, how much of an improvement is this really? But then there's the question of, okay, well, if you raised it to 25, then how many countries would actually sign up? But, you know, you mentioned we should, in part, blame our elected leaders. I think a lot, the EU certainly blames Ireland. You know, they were, they've been obsessed with this issue for years and have criticized Ireland's government a lot. Should we also be blaming the tech companies here, who so often preach their patriotism, talk about
40:49 Ed Elson? how they're creating jobs and shareholder value for, for Americans? And then meanwhile, they're booking all their profits in Bermuda and Ireland. Do you think that our public discourse should hold Tim Cooks, Sundar Pichai, Satya Nadella, should we hold them more to account?
41:06 Scott Galloway? I mean, we can try and shame them, and there's some value there. But at the end of the day, these companies will do what is best for their shareholders within the confines of the law. And if they have to engage in tax avoidance, as long as it's legal, no one remembers anybody. No one's going to say, at my funeral, Scott was a good guy because he paid more taxes than he needed to.
41:23 Ed Elson? I'll do that.
41:24 Scott Galloway? Will you? They'll say Scott was a good guy because he was generous.
41:26 Ed Elson? He was a great taxpayer.
41:28 Scott Galloway? Oh, my God, he paid ridiculous tax rate. Just crazy. These companies, see above, we just talked about, you know, oil companies. Shaming is, it feels good, but it doesn't have a lot of impact, is what I've found. And waiting on these companies' better angels to show up is just not a good strategy. You need enforceable tax code across borders, and it needs to be more than 15%.
41:52 Ed Elson? Let's take a look at the week ahead. We'll see earnings from Charles Schwab, Bank of America, Goldman Sachs, Morgan Stanley, Johnson & Johnson, Netflix, and Tesla. Do you have any predictions for us?
42:04 Scott Galloway? Nelson Peltz is going to get one, possibly two, board seats at Disney in the next two weeks. 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 Drew 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 on markets every Monday.
43:12 Scott Galloway? This Halloween, I'm going as a vampire that likes to suck dick. I am sperm count. Holy shit. Too much. Wouldn't it be count sperm? The women don't like it. Ed is laughing. Oh, wait, Claire likes it. If Claire likes it, we're in. I want to lean into profanity here. I think that's our trademark.
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