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This is Master's in Business with Barry red Holds on Bloomberg Radio.
This week on the podcast, another extra special guest, David Rue, is chairman of Baypine, a fascinating private equity firm. They are not interested in simply flipping companies or buying firms and then quickly selling them. What they do much more
involved than a consulting firm. They are experts at digital transformation across a wide variety of sectors in the investing world, and they essentially take companies as varied as tire manufacturers and industrial producers and re tailors and find intelligent ways to use technology to make these companies more efficient, more productive, more profitable. And they're not again, they're not just consultants. They come in, they take a steak in a company.
Sometimes it's a minority state, sometimes it's a larger steak, and they help affect this massive change with great results. They're one of the few companies that specialize in this. Their track record has been very impressive and the approach they bring to transforming old industry companies is absolutely fascinating. Previous to Baypine, David was one of the co founders of Silver Lake Investors, a legendary firm from the nineties
and two thousands. With no further ado, my conversation with Baypines David.
Rue, Thank you pleasure to be here.
It's a pleasure to have you. I've been looking forward to this conversation for quite a while. Let's start out with your background. Bachelor's from Harvard, Masters in philosophy from Cambridge, and then an NBA from Harvard Business School. What was the career plan?
You know, I originally wanted to be an architect.
Really, I've always wanted to pretend to be an architect's That's an area I'm fascinating And why did you not go into that space?
You know, I grew up, you know, building goat karts and treehouses and the like. But I think when I got to school, I found that I could make models, build software, maybe create organizations, and that it was as much fun as building a building.
There's a different sense of creating a company versus creating a certain type of space inhabited by people, no doubt about that. So let's talk about some of those companies that you built. You begin at a few tech startups, you found day Techs, which eventually gets acquired by Lotus. What was the startup process? Like, this was mid nineteen eighties, is that about right?
Yeah, early eighties. You know, in business school, I realized this is the kind of early PC boom. And I realized from my academic work, you know, there were word processors, there were spreadsheets, but there was not very good database technology for PCs. They didn't have what the mini computers had and the mainframes had. So I saw an opportunity to create some software and also to be able to marry that up with data for people to use on their PC. And that was the idea behind day Text.
So day Text gets acquired by Lotus, who eventually acquires Lotus.
Lotus is eventually acquired by IBM by coincidence. That was a relationship I managed. So I had a very good kind of ringside seat in all that. They were very interested in the company's suite of primarily communications technologies ccmail, Lotus notes because the sort of networking boom had already started up, and they saw a world where all of these PCs would be interconnected.
How did you end up at Oracle?
I had met Larry Ellison during my Lotus days I'd done another company, which we sold to Symantec. Larry had contacted me and said, look, we've got a tiger by the tail. The business is growing like crazy. I think there might be some M and A opportunities. We really don't have a corporate development function. Would you be interested to come here and build one. That's how it happened.
Oracle, especially in the eighties and nineties, became famous as a serial acquirer of all sorts of pieces, spinouts, roll ups. How long did you stay at Oracle?
How was there all through the nineties till nineteen ninety nine. You know, it was really a terrific experience, extremely rapid growth. I ran the venture fund, did all the investing off the balance sheet.
I also.
Started and managed the M and A programs. So yeah, it was fantastic.
Yeah. I can imagine Oracle in the nineties as you were out in California and.
Assume right Silicon Valley, right in the heart of things, ground zero, and I got to think Oracle and Ellison like I cut my teeth on them.
In the nineties, he seemed to have been everywhere. Oracle was consistently ranked best company to work, Top ten, Fast and growing companies like Oracle. I think people who just came into the market in the past ten twenty years don't know what a powerhouse Oracle was and still is.
Yeah, it has a remarkable history, you know, a class of eighty six, meaning that's the same year as Microsoft, Sun, Apple, and so they've been at it and doing a great job for a while. You know, Larry's often thought of as a very aggressive and astute business mind, but I don't think he gets enough credit for his technical chops if you look back, think about it. He has been
fearless about betting the company on major new architecture. So you know, he made the original bet around relational databases when everyone else was doing something else. He then made a major bet on Unix when it was a kind of obscure, you know, scientific operating system. He then made a huge bet around enterprise applications, big bet around client server. And then maybe the most courageous bet was in the mid nineties when Netscape had gotten the first browsers out
the Internet boom it started. A great story came in one morning after a weekend. We all sat down at our little executive committee call and he says, look, I've been thinking, I think this Internet thing is more important than most people understand. I would like to change one hundred percent of what we're doing in development. I want to stop all of the client server work, and I want to replatform everything that we're doing on a web architecture.
Three thousand engineers, dozens hundreds of products, affecting you know, thousands upon thousands of customers. And he very casually said I'd like to do this by the end of the day.
Sounds like that's a multi year project.
He was he talking, no, no, no, he was talking about I want I want to direct to the turned to the director of engineering and said, I want this done by the end of the day. Just poured it over to its just going to stop. We're not going to write another line of client server code. It's done. This is going to be the new architecture. This is the future of computing. This is what our customers are going to want in two and three, in five years time, so we need to start building it now for it
to be ready. Then it was really the thing I mean, I mean, just a incredibly gutsy bet, but a very good sense of his technical prowess and the confidence he had about the kind of what's coming next next part.
It sounds like Oracle was quite an experience at the end of the nineteen nineties. You co found silver Lake in nineteen ninety nine. What led to that? You were you were at Oracle. You were like a fifteen year veteran at Oracle. Is that about right?
No, not quite. But I'd been there a while and it was, you know, a fantastic experience. I had a great job, really good relationship with Larry, rest of the team. You know, I was my late thirties. I'd kind of come to realize that it was always going to be Larry's business, rightly so, and that I was looking around and I saw what I thought of, as I've come to call it, an OIPSE, which is acronym OIPS for an opportunity and plain sight. And I couldn't understand the following.
I couldn't understand why investors were pouring money into venture firms, pouring money into growth equity, and not doing anything to invest in technology using a private equity format. Didn't make sense to me. That it would be a good small company, it would be a good medium sized company, and then all of a sudden it would not be an appropriate place for fiduciary capital. That didn't make sense, and I thought, gosh,
that must be a huge opportunity. You know, we were right in the middle of the Internet boom, so tech was, you know, front and center of the news, and yet there was none of the traditional firms were there. In fact, they were actively avoiding it. You know, it was sort of not considered an appropriate place to invest that kind of capital.
Why was that? Was it that people were just so distracted by the new hotness, by the dot coms and.
The Internet or I don't think so.
Well. Were the public markets there for larger companies if they needed capital.
No, No, I don't think that. Here's what I think, because this is what they told us. I mean, I asked that exact question. The theory was this, you couldn't go write checks for hundreds of millions of dollars if you couldn't underwrite the technical innovation at the heart of these business models, if you didn't understand how the semiconductor worked, if you didn't understand how the software was built.
One.
Two.
There was a theory that these businesses had volatile cash flows and therefore couldn't be leveraged, which was the you know, the whole point of leverage buyout. And finally that they were companies run by children, you young folks. I was in the business, and when I heard all that, I said, you know, those guys in New York and the skyscrapers, and the guy in London and those people in Munich and Tokyo, I don't think they really know what's going
on here. These are actually really good businesses. The cash flows are unbelievable, customer franchises are very, very durable. There's incredible organic growth here. This is a really big and attractive opportunity. I think someone's gonna make a great return by building a business here.
And you don't need to underwrite the entire underlying technology. You're really just talking about that transition to whatever makes those companies that much more attractive. Is that a fair assessment?
When you're doing what silverl does and what it was built to do, you are making a fundamental bet technology. It's like when people buy technology or enter into an agreement with a company like an Oracle or a Microsoft. You're not buying what they're selling you today. You're buying the promise that they will continue delivering. It's like buying a lot on a river. Now you're not buying the water in front of your house, You're buying the promise
that the water will continue to flow. And so you do need to have a point of view about how well positioned these companies are for the future.
You co found silver Lake with this is some lineup. Glenn Hutchins, Jim Davidson, Roger mcnamie. Tell us about your silver Lake co founders.
Well, look, they're each enormously talented and capable in their own right. You know, we all live near each other, knew each other professionally beforehand. We talked extensively about this opportunity and agreed that it was the next big thing. And I think that, you know, looking back on it, I've been very fortunate at silver Lake and prior companies when I started something to do it with a group of people, and that it's always been great to have
folks from different backgrounds, different styles, different professional experience. You know, it's very complimentary and you know it's not for everybody, but for me, it's it's the way I like to do business.
They weren't an oracle prior. How did the how.
Do we all know each other. Yeah, Glenn and I have been college classmates, tennis partners, fly fishing buddies. He was previously at Blackstone. Jim Davidson and I are both big sports fans and shared season tickets for the Sharks and the Warriors, so we would spend a lot of time together. He was running the H and Q Investment Bank, and then Roger was my next door neighbor and very
good friends with Jim. So you know, it was a group of people who already kind of knew each other, had some personal relationships to build on, and you know, came with a different set of experiences.
What was silver Lake like in two thousand as the dot COM's all imploded.
Well, you know, it was an interesting thing. I would jokingly tell people that we bought high, sold low and made a ton of money, and you know, it was a very challenging economic environment. The NASDAK during that period fell eighty percent right over from the front front end of the fund to the back. The fund itself, in a very fundamental way, was set up as a counterpoint to the mania around the internet. And what we would tell people pointedly, as we say, look, you're completely right
to be excited about the technology sector. It's underinvested. It's underappreciated for its scale, it's underappreciated for its growth, it's underappreciated for the strategic value that it plays in the economy. But you're investing in the wrong companies at the wrong price. And I had a little chart that I would show them. So here's a thousand, approximately one thousand public company public tech companies at that time. These ten percent are what's
driving the entire valuation. They're trading at ten to thirty plus times revenue, not earnings, not earnings revenue. And I said, I can just tell you that is the wrong price. Not necessarily bad companies, but that's those are the wrong prices. I said, but look at these other ninety percent. If you take the rest of the publicly traded technology companies, they're traded at one time's revenue. It's the same as the S and P at the day of.
The day, pretty reasonable, more.
Or very reasonable, and they grow twice as fast. So you have an opportunity to buy growth at half price. You've got this situation. There's sort of the fundamental insight at the heart of the silver l like value proposition. Is that technology, the entire tech sector was on sale, even at a time when people thought it was super expensive, because ten percent of the market was super expensive, but most of it was not.
How much of what's been going on in the twenty twenties has been a focus on that same top ten percent of tech companies as being overly concentrated and wildly expensive. Do you think the same situation is starting to show up in the modern era?
Well, there are some parallels and also some important differences. The parallels are that there is a concentration of interest. The differences those companies are now huge businesses with gigantic levels of profitable unprecedented levels of profitability and growth rates that have never been achieved before by companies at that scale. So that's the part that's really different, Right. A lot
of the things in Internet time was highly speculative. The other thing that's different is that today the companies with the most spectacular valuation levels are private. People aren't wrong to say they are a winner the sort of the bed of courses. Are they the only winner?
Right?
And so you have to believe that there won't be successful competition, you know, I would only point out that forty percent of their sales go to four big vendors, each of whom has their own chip development program. And so I'm not saying they're going to build a better chip, but they're definitely going to build a cheaper chip, and so there'll be some dampening for sure from that.
And you know, I'm around long enough to remember when it looked like Intel was impregnable, that they had a position in the ecosystem that nobody could touch, and now it feels like they're and also run well.
This goes back to the point that you raised earlier, which is if you're going to do tech investing, you need to have an opinion about the tech. It's not just that you can look at a series of financials and say, oh, they had a good quarter last quarter, they had good year every year numbers I like the three year trend and say fine, you have to separately underwrite the quality of the underlying architecture, what's going on in the industry, and believe that they're going to be
able to keep going. And so like, if you like go to end video, let's talk about that. You can look at the financials and say this is fantastic. You know, they're doubling and trebling, and these are incredible numbers and growing blah blah blah. The way they've gotten their improvements has been to go beyond what has been possible in
any other chip manufacturer. The other chip manufacturers have gotten their productivity improvements around the physical geometry by making the chip smaller and smaller, more and more transistors.
Classic More's law down to ever smaller.
Ever smaller. Right, these guys have got have stolen a march on the rest of the industry with their GPU chips by doing other things. They've gotten probably two or two and a half times, which is a lot of improvement. But they're talking about improvements of things that are kind of eight ten, twelve, sixteen times productivity improvement. So they're
doing it other ways. They're doing it with algorithms, they're doing it with other approaches, and so you have to form an opinion as an investor about what is the likelihood they can keep doing that because it's been the key driver, and keep doing that for the next three to five years, not just the next quarter. Bingo.
So let's talk a little bit about Silver Lake and how that eventually leads to Bay Pine. It feels like, and I don't know if my memory is correct. Silverlake was one of the first buyout shops built around making technology investments or investments in technology companies. Is that a fair description.
Several other deals had been done, but they were occasional and they weren't the central focus for anyone.
Tell us some of your memorable investments at Silverlake.
Well, I think some of the investments that the firm is best known for out of the box. First was Seagate, which was a hard disk drive manufacture. It was at the time the number one producer dis drives. They had the best technology, great management team, very complex, but finally crafted extended supply chain through Asia, and Wall Street hated them.
It was hardware in the age of the Internet. So the other thing that traded really really hot back then was any new telecom business, right optical this telecom That one of the insights that we had as a group, and it stemmed from the fact that we were not finance people but industry people with operating backgrounds, is we
understood that the entire tech industry is an ecosystem. It operates like your body, right, All the parts sort of need to fit together and they operate inter dependently, and so everybody at that time was talking about the information super Highway and they were buying the highway, right, They're buying the telecom companies, and they were buying all these new applications that you could do on the Internet. But people forgot that you couldn't have an information super highway
without parking lots. In other words, the electron the bit had to start somewhere and it needed to end somewhere. So if you believed that broadband was going to explode, then you must also believe that storage is going to explode. And so we were able to look at that kind of systemic arbitrage around the architecture and say, you know, the comm's piece is overpriced. I don't think we should pay ten and fifteen times for a pike when we
can pay six times EBITDA, EBITDA. Earnings for the number one storage company in the world, Now, there was a bunch of applications around things they owned, and you know, it was a public company, so it was a leveraged buyout and all the rest of that, but that was really the fundamental insight.
So it sounds like a lot of the public market investors had a fundamental misunderstanding about the entire tech sector, the ecosystem as you described it. What are the things did people just not get, not understand, overlook obvious investments in plain sight?
Yeah? Well, I think in that case it was a hangover from the very real war of attrition that for the prior twenty years had preceded that moment in time where the industry went from one hundred and twenty disdrive companies to sex or seven.
We had an idea who are the winners who were going to be well?
And so the question was is there going to be more blood in the water or have we arrived at an industry structure where everybody is going to do okay and the number one player is probably going to do better than most. That was one. The second issue is could anyone figure out a way to At the time, Seagate owned some shares and other software companies, and it wasn't clear to the market how they could sell those
in a tax efficient way. And that's one of the things that with structuring we were able to figure out. I'll give you another one where we bought a vago Eulett Packard's semiconductor division in this TI frame, the early two thousands, it was very much the fashion to be out of semi. Semis were out of fashion, right. The world was infatuated with the other end of the stack, not the you know, I didn't want to hear it.
People didn't want to hear about semis. They didn't want to hear about subassemblies, they didn't want to hear about components. They didn't want to hear about computers. They wanted to hear about all the sexy, high margin, no cost of goods, no capital equipment, software services, internet applications sounded wonderful. You know, this is the age of pets, dot com, that thing. And so it wasn't wrong to say that software was good,
but it didn't automatically follow that hardware's bad. And so people had this idea, almost like a dialectic, which is that you couldn't believe in something that you like, that the other must be bad. And so semis were completely out of fashion. Semens spun theirs off, HP, spun theirs off, IBM,
either closed or spun theirs off. You know, just all these peoplehood who had very significant capabilities and fabs that today would be worth fortunes leave aside the intellectual property and the skill sets and the trained labor force you know, you know, all went off the back of the truck. So we bought this from HP, hired a great manager CEO named hot Tan, and built this up into a
kind of highly specialized and others. We didn't buy it with the idea that we're going to go compete with Intel and try to dis lodge them from the PC market, but rather with the idea that everything was going to have a processor, cars, kids, toys, you know, your kitchen appliances, and that somebody was going to have to make all those processors. And so there was an exploding rest of market opportunity that Intel wasn't focused on that people like Evago.
Could be Today. I think automobiles are the second biggest consumer of semiconductors. I don't know if that's still true, that was true a few years ago.
I think that's right. In fact, the Stata i Avn' quote for people is that the semiconductor content in a car is more valuable than all of the metal, than the all the steel and all the aluminum. And maybe more importantly, it is increasingly the case that what the semiconductors enable the navigation, the.
Abs, departure worn, All the features that really give a car kind of its identity are increasingly denominated by the digital capabilities. What about the rest of the world outside of PCs and automobiles. It was incredibly for looking to say in the early two thousands, by the way, they're going to be chips in everything, not just dishwashers and refrigerators, but toys and electric bikes and you name it. It's going to need a chip that was a decade ahead of its time.
You would have been very immune. Is when we raised our first fund You may remember the Ferbie doll, sure, of course, which was a hot hot productry hot kids product, little furry thing, eyes bad and it had in it a digital signal processing chip. They would allow it to make a little noise, cuddly noises, and you know, whittle its legs. And I used to bring it with me to all of our fundraising meetings. I wouldn't say a
word about it. I'd simply take it out of my briefcase and I would put it on the desk between myself and the prospective investor, and I wouldn't say a word about it. You know, I'd launch into my talk about semiconductors and hardware and the evolution of the sector and so forth. And finally, sometimes it would be five minutes, sometimes ten, but it was never more than thirty minutes. Right the investor would say, David, what is that doll? Why do you have that doll there? I go, oh,
I'm so sorry. I forgot to mention it. That's a Ferbie doll. And I brought that for you because I wanted to illustrate in a simple way how the march of technology is going to go. I said that Ferbie doll has more processing power than the lunar land.
I knew you're going to go that way.
And I said, we're looking at a world where all of music is going to be digital, all of film is going to be digital, Television is going to be digital. The way you do your phone is going to be digital. I said, So all of these analog things, as they
become more digital, need this technology. And if you understand how the technology works, you will not because you're kind of a big brain genius, but because you've played the game before and you understand what all the pieces do, you'll be in a really good position to identify those
opportunities going forward. I'll give you another great example. The part that and the little wrinkle that I think gave us a lot of credibility, and by the way, gives us credibility now is to say, let's own the right technology, put it in the right companies, and the key part is at the right price. It is bringing an investment sensibility and financial discipline to the work that we do. Right. We're not like technology zealots and I want to just own it. To own it right. It's not a prize,
it's not a trophy. It's you know, would this be useful and would somebody else be interested. I'll give another example. eBay came out of the blocks super hot. They bought PayPal, and then they bought this thing called Skype, and Skype was the first software based peer to peer video conferencing capability, so long before Zoom. Twenty thirty million people on at the same time, which was an amazing technical feat. Wasn't exactly here what it had to do with auctions, even
less clear what it had to do with PayPal. But eBay bought Skype and it kind of noodled along in the Skype portfolio in the early two thousands for a year. Two years, no one paid any attention to it at all. We said, my gosh, look they've had three CEOs in two years, they're spread out all over the place, they haven't upgraded the product in two years. Maybe they'd be willing to sell it. Contact with them once, contact them twice.
Eventually they said, yeah, we'd be willing to talk to you about that, because we had a point of view about this is a really exciting market, but no one's paying any attention. So if we could carve that out, we want to. Eban said, keep it as much of this as you want. We'll buy the rest of it at a full valuation, which we did. And it was a business that had nice growth despite really being a feral child, right and we said, look, get paid twice.
We'll pay you once what it's worth, and we're going to make this way more valuable than you possibly could because we can focus on it and make a bunch of changes. And it was. It was sort of a troubled, was complicated asset where you know, there was so much staying in litigation. They hadn't upgraded it for a long time. Apple had just announced that they were going to be offering a you know, video video face time FaceTime. So there was you know, Microsoft said they wanted to be in the business.
So there was a lot of companies.
There was competition from very credible large players.
And if I recall correctly, around that time, all of the fat pipes and broad bandwidth that had come public in the late nineties early two thousands were coming back up around pennies on the dollar. I recall Global Crossing, a Mentro Media, Fiber and all these companies. So the bandwidth was coming a line at a cheap price that didn't exist that way in the nineties, which is very much right into the sweet spot of Skype.
Yeah, and by the way, not so just similar from the AI process sink crunch that we have today, where people are pouring a huge amount of super expensive stuff which you do need, but which will be available three years and five years and ten years from now.
Mut's really really different pricing you end up buying them, if I recall directly, not much long after that did Microsoft come along and scoop them up from you.
Well, what happened is is that we bought it, completely, upgraded the software, changed out the entire management team, developed a series of partnerships, built a business side of it because it had been very much kind of B two C phenomenon, try to really opened up a product line around B to B and it ended up being very attractive for Microsoft sold it to them, you know, one of the foundation elements in what his teams today, and
really helped them. I think it was a great It turned out to be a good deal for silver Lake, but it also I think, as all deals should be a very good deal for the acquirers.
Any other any other memorable civil like deals.
Were oftentimes you know, I think the maybe two others that we are well known for. We're the largest investor in Ali.
Baba before it went really before it.
Went public, and that was a you know, explosive that was that was explosive, but it was a scary investment. It was a minority investment in a Chinese e commerce company, you know, located on the other side of the world.
Who's also your co your co investor is the People's Republic of China, right they own ultimate regulator for sure owner slash regulator.
And you know, Massason and soft Bank are already large investors. But we liked the management team we love the story, and that turned out to be a you know, very good that was a very very good investment. And then the last one and really still very much in the news was Dell, big well known public company, you know, eponymously named for its CEO who'd left kind of like you know, Charles Schultz left, came back first, went private where Michael rolled essentially all of his ownership into it.
Made a very large personal bet. So it was a gutsy bet because it was at a time again, this is a place where the conventional wisdom was the PC was going away, we were going to use our phones, We're going to use iPads. Somehow it was going to go away. We didn't think it was going to go away.
And we thought that the market hadn't really appreciated how much work Michael had done building up a store of intellectual property around next generation computing, whether it's cyber cloud computing, and you know, maybe it's like maybe a basketball franchise that has a bunch of draft picks, you know what I'm saying, kind of young talent, which we thought was going to be very valuable because we had a point
of view about the importance of cloud. We had a point of view about the importance of cyber and we thought that those assets were undervalued because the whole of the company was getting valued like it was a commodity PC vendor.
So let's talk about what did you do post silver Lake in the twenty tens.
I'm a starter and a builder. I like backing social entrepreneurs and feel particularly passionate about conservation, biomedical research and education. We took our foundation resources and focused it first on a thing out in Seattle called the Institute for Health
Metrics and Evaluation. Stood that up. Bill Gates blessedly is doing most of the support now, but that's now you know, five hundred researchers, and they focus on understanding in detail the global burden of disease, so that we know how healthy or sick you know every country is, and you know where to allocate our healthcare dollars. On the biomedical research side, became very active as the chairman of Jackson Laboratories, one of the largest independent institutes in the country, focused
on kind of the genetic causes of rare diseases. We were able to double the size of that quadruple that endowment, and then more recently in the education space. I had this view that we were not appreciating how big artificial intelligence was going to be, and that as a consequence, as a nation, we are underinvested in advanced computer science and others. We've got programs at all the best universities, but they graduating hundreds of people, tens of thousands, maybe
even hundreds of thousands that we need. Really yeah, because what's happened is that the academics are focused on building the new platform, the so called large language models. When think about that, like it's a nuclear power plant, you know, complicated high science, but we now it now works, and it'll work a little better, and they'll keep refining it and so forth, but it works, and that what we need next are application engineers. We need electricians. We need
people to design appliances. We need to run wires, we need to change from steam to electricity, and we don't have those people. And so we already know what we need. It's going to by the way, it'll be twenty or thirty years of implementation ahead of us. So these will be great jobs for a lot of people. So we've
built the first school. We've spent a few years getting that organized, opened it in twenty we're now, I guess four years in we've got a thousands to two hundred corporate partners and started or accelerated ninety four companies, four hundred jobs. You know, really exciting.
You're doing this for a couple of years. You're standing up.
I'm happy as a clam. Right, I'm making things, I'm helping people.
Right, you're running the Rue Family Foundation, the Ru Institute.
You're basically I was not looking to start a new business, much less an investment firm. Right. What happened is is that my very good friend Anjin Mukherjee, we were talking about the future of private equity. During that conversation, we're saying, you know, this next generation of private act needs to do something different if we want to continue producing the super normal levels of profit that we've seen from the asset class. Because there's more competition, prices are higher, credits
more difficult. You can't count a multiple expansion, So you're going to have to make the business you buy better during the pendency of your ownership. There's only so much procurement improvements available. You can only upgrade management so far. My observation was this, which is that I said, you know this tech thing, it's only ten percent of the economy. When you take all of GDP, When you take all of semis, all of computing, all of networking, all of software,
all of social media, it's ten percent of GDP. I said, what's going on right now is the other ninety percent of the economy is being digitized. Huge opportunity. Now, big difference is that now the nature of technology is that it's the only capital good that really kind of decreases in price and makes itself smaller. Right, So you think about what's the difference between now and twenty years ago.
Now the technology is much smaller, it's much more ubiquitous, it's much less expensive, and it's much easier to use. All of those things. Mean, it's going to go everywhere. So we're talking about this and we're getting ourselves lathered up about the fact that all of these analog companies, industrial firms, consumer firms, healthcare firms, services companies, they all need to adopt more technology, but none of them know
how opportunity. In plain sight, it's dead obvious that they're going to do this, Right, you think about the companies that you know in those kind of sectors, that are doing well are almost always those that have adopted the technology earlier, right, you know, JP Morgan and Finance, or Walmart in retail. You know, those companies that get there early get a big leg up on their analog competitors.
We said we could do. We could build an investment firm that not only could write a check, but could be your technology part partner in helping you architect a business model future that would allow you to grow your company faster, perform better, you know, produce more profits you know, and drive value.
So let me push back again against one thing you said, just a little bit. Please, this opportunity in plain sight. If it was really in such plain sight, everybody would be doing it. But instead it takes a couple of guys with a lot of technology experience, a lot of operational experience, and financial experience to make this real.
I partially agree. Okay, all right, here's the partial part. The partial part is is that I think the opportunity is easy to see. I think the execution is hard is the challenge. So the way I oftentimes say it is that it's easy to describe. It's just really hard to do. And it's hard to do because you need
to understand the technology itself. You need to know the vendors, you need to be able to set priorities, you need to have a realistic sense of time, and you need to know how to weave this new technology into the processes that already exists. It's not like these companies have no tech. Everyone, any company of any scale, has an
ERP system. They have a bunch of databases. There's compliance issues, there's cyber there's all kinds of things, so that you have to integrate into what's already there.
So when I think of private equity, at least from the nineties, two thousands, even the twenty tens, I think of them as a form of financial engineering to unlock value. What you're really describing is digital transformative capital, to steal a phrase from your website. So this insight is, hey, we don't need to just do financial engineering. You get these companies to adapt the latest greatest tech in a way that's useful and productive, we can really unlock a
lot of value. Is that what led to bapine getting launched and you kind of coming out of retirement to try it again.
Yes, I mean that was sort of engine calling for the lefty from the bull ten.
Right, right, let's get the lefty.
Yeah. So it started innocently enough where it was really a conversation between two friends with a lot of mutual express you know respect where we had a similar you know, fifteen twenty year runs in private equity. So we were very current, highly topical understanding of what was going on, and we realized that we could take and put in
one place. Really, it's like a binary weapon, right where a mooker g quality, world class private equity firm with fabulous diligence, great structuring, really thoughtful modeling, you know, great financial engineering. We don't want to throw that away. You know,
those are all valuable lessons. But compline it with the operating prowess, tech insight, and extended personal network of relationships that would allow us to do things for and on behalf of our portfolio companies that simply wouldn't be possible, practical, or maybe even imagined by our competitors.
It sounds like your competitors are the consulting firms who come in and you know, kind of seagull an event. They come in and they eat everything, they grap all everything, they fly away as opposed to you guys not only coming in with technology experts, these operational consperitse, but capital writing a check. That's a very different relationship than paying a consultant.
Yeah, you know, it's interesting. The consultants actually play a very important role, and I wouldn't want to diminish it. Okay, around awareness building, and when we go into talk to a management team, they almost always have had a consulting encounter, right, and they'll have a stack of PowerPoint slides which they'll kind of run to their office to show us. That says the consultant told me, there are sixteen things that I can do with technology, but I don't know which
one I should do. I don't know what I should do first. I don't know who should do it for me. I don't know how much should it should cost that to take, I don't know how it integrates with what I've already got, and I particularly don't know what to do if anything goes wrong. Right, And so it's the it goes back to the implementation part. And so what we like to see is a management team that has self awareness and enthusiasm but are not themselves technically fluent.
Where you know, we can bring that to the party in a way that can be catalytic for the management team to give them confidence because they have a willingness to act. They're just not sure what to do and they don't want to do any harmful. They want to do something harmful, and so having somebody who's done it before, been there, you know, is super useful.
So, so let's talk about some of your portfolio companies and how they're engaging in digital transformation. We're talking about AI earlier. How are you guys looking at AI to facilitate taking some existing companies and making them more productive.
Yeah, well, first thing, we could spend a whole session on AI. But here's what I would say. First, we believe it is actually, despite all the height and notwithstanding all the attention, it's already received bigger than most people think.
Yeah, I'm with you on that. I'll give you a funny example please. So I'm in the midst of putting together a manuscript and the publisher they're not keen on doing an index. Takes a couple of months. You're paying a person all this time to look up every name, everything, every that for a couple of hundred bucks. There's an AI pdf indexer that will identify every proper name in four hundred pages and creating an deck relative to and I'm just imagining reproducing that sort of dumb mechanical work
over and over and over again. And I know I'm just scratching the surface here.
It's a great it's a great example. I think that right now, most people's experience of AI maybe is a chatbot, right, you know, chat GPT or you know.
Or any any go to any car company, you get that pop up and you know that's not a live person until the morning.
What I always say is, just imagine all the best AI current ones today. And by the way, the ones that you're seeing today are the worst that you will.
Ever see a little better every day.
Worst you will ever see. They they read, they write, they hear, they see, They can compose poetry, music, in any job, photorealistic images, they can create video. All of this today, right right, this is all available today. They also write computer code as well or better than most programmers. They can do complex mathematics, they can solve puzzles, they can play games, they can run factories, they can drive cars.
It is really hard to overestimate what's possible, and we are standing really for the first time after decades of discussion about it on a you know, on the brink of real white collar dramatic white collar productivity games, really dramatic. Best example that I would use for you to to kind of give you a framework for it, is that you're going to see a lot of AI show up as features in products that you already use, like you know, all your Apple products, right, will have it soon. The
first thing you get with is probably a product. It will be agents, you know, something that works with you, like a partner, right, like a writing partner that you would use right, sort of a you know, think about it's a more advanced version of what you were just describing. The best thing out there right now. To illustrate that as a product called Copilot from Microsoft, which works with
a software engineer. You have it running on your machine and it's basically a programming buddy that will help you write code, suggest different options, you know, help you debug track blah blah blah, and it typically improves productivity twenty five to fifty percent out of the box, amazing and then just and can be up to one hundred percent.
Right.
It all by itself has dampen the demand for computer programmers really because it's made the ones that we have so much better.
You've just done you've you've doubled the effective productivity up to.
But think about it as very dramatic, right, you know, if you had five, maybe you need four if you you know, it's just a really significant, uh improvement, which makes it practical to imagine that you're going to be able to do this in law firms and accounting firms and consulting firms, where you take your average employee and make them as good as your best.
So let's take an old economy company that's not traditionally tech oriented. You guys own Mavis Tire Express Services. How does a consumer service business like that get digitally transformed?
How do you model? Walks into our office and said, I know everything in the world about tires. I know where to buy them, not to store them, not to put them on, how to rotate them, I know how to balance them, I know how to align them nothing. I know everything about tires. I know anything about technology. But I have a very strong opinion that technology could help my business, and I just don't know where to start. I've got He had talked to a bunch of consultants.
He had lots and lots of ideas, and.
There were hundreds of these Mayavis stores right.
On thousands, thousands. There were a thousand Mayvis stores when we first started chatting three years ago. So it's a you know, it's a good size, it's a good size business, very well run, nice growth, profitable. So it wasn't not a business that's broken, but a business where the management team had a felt need around the opportunity to make it better and and and really steal a march on
their competitors. And so what we did is sit down with them and say, look, here are six different use cases that you know you might want to think about. Here's a way around you know, digital marketing. Here's a better customer experience. Here's what you can do around inventory management. Here's labor productivity and capacity utilization planning, here's dynamic pricing. And we went through an entire kind of you know,
brainstorming session around that produced a whole plan. So you know, usually when you do a new investment, you'll do an underwriting, and we do a normal financial underwrite, and like everyone else, what's different is we also do in addition a separate digital underwriting where we talk with the management team to create, you know, a technology roadmap for the enterprise that integrates with their business model and extends it to create performance improvements.
And what we did with them sat down. We got better digital marketing so that the search engines optimized for if you're calling and writing in I've got I got a flat tire and I'm in Poughkeepsie, then here's where you go. Improve the customer experience so you know, you know when to bring your car in, limit weight times, Accurate estimates of how long it is going to take,
what it's going to cost, what your options are. Dramatically improved kind of labor utilization in the shops, capacity utilization, got the pricing right so that we manage margins and customer expectations appropriately. All of that, some of it we could we could get done in two days or two weeks, but some of those things has taken us two years to put up. The end result, though, is that the business is now more than twice as big huh, roughly
twice as profitable. And that's not all due to the digital, but the digital is very fundamentally enabling of that growth as you might imagine if you're opening new stores, it's a lot easier to do if you do the same thing in every single store.
So let's do it. Talk about another portfolio company, Pollywood I Density Palathene outdoor furniture. How can technology improve that?
You know, it's an interesting business. It's a specialty manufacturing company that builds kind of very high quality. It feels like wood outdoor furniture, very durable, colorful, but doesn't chip, doesn't fade, doesn't need to be painted, doesn't need to be painted, you have to take it in during the winter, any of those things. So that's sort of the fundamental
value proposition of the thing. But here's the difference, which is that we said, look, you guys are manufacturing guys people who built it, and they're really good at that because they use recycled plastics, so it's incredibly sustainable. You know, they drill the holes, they do the trimming, they just take the plastic waste put it back on the top. So it's a zero waste, highly sustainable, fantastic story. During COVID,
they grew their online business a lot. They're not marketing people, right, so we're able to show them how to significantly improve yield on their online the e commerce side of the business we're to and we're able to do that, by the way, very quickly, almost instantly around that, able to see how to get to new adjacent market areas based on finding more people like the ones who are you know already buying.
Once you identify a customer you want to be able to identify.
Once you identify them electronically, then it's a lot easier to find that electronic signature similar people and go look for it online rather than waiting for people to find you.
The other thing that we're doing there is that we have highly automated manufacturing and so that we can we can take the manufacturing and instead of manufacturing twenty or two hundred chairs, putting them in a warehouse, sending them to a distribution center a store, and hoping somebody buys them, we can instead take an order, build the chair, send it to them. So it's not just just in time,
but it's real time. That creates pulls, so that dramatic improvements and efficiency, but it also makes it hard easier to do custom things. Improves turnaround time, you get your furniture much faster. Those would be good examples.
Huh, really interesting. I only have you for a few more minutes, so before I get to my favorite questions, let me just ask you one last question. We talked about the Real Family Foundation and institute. Briefly, tell us a little bit about what you focus on with the Real Family Foundation.
What we like to do is find social entrepreneurs, folks who are looking to make scale impact in education, particularly educational access, conservation, you know, kind of environmental things, biomedical research, and then a particular focus of mind is around helping support veterans in their families.
Really really good stuff. All right, So this will be our speed round. I have about four minutes five minutes to get through five questions. Let's just do this quickly. What's keeping you entertained these days? What are you watching or listening to?
Right now? My wife and I are watching The Lioness and The Diplomat.
We're about halfway through The Diplomat, so no spoilers. Season two good.
We loved The Crown, and I am waiting anxiously for season two of wolf Hall. The Henry the Eighth and Thomas Cromwell story. In podcast land, my current favorite is Fall of Civilizations by Paul Cooper.
Interesting. Tell us about your mentors who helped to shape your career.
You know, I've had a couple. I've been very fortunate. Early guy was a guy named Chuck Glover is a newspaper guy who ended up running Cox Enterprises, the media company he funded my Cox funded my first company. He was a newspaper guy, and the key lesson from him was, look, I had to put out a product every day, and so just getting in the habit of putting one foot in front of the other, making a little bit of progress every day and just keep going was really valuable.
The other guy who was great for me was doctor Frank King. What I learned from Frank he was the head of engineering at Lotus and it had a similar job at IBM before that. What I learned from him was that the people were more important than the.
Products, and that building your organization primacy of people and particularly always being recruit you know, always recruiting, being kind of on the pro all the time was super valuable.
Let's talk about books. What are some of your favorites and what are you reading? Carl.
I'm a Mark Halpern fan. I loved Paris in the present tense. I like Don Winslow. City on Fire is one of my favorite books, first in a trilogy with City of Design, City of City in Ruins. I like Anything by Dennis Lahane, Anything by Elizabeth Strout, and I'm currently just finished The Magician by Edmundavaal Just Reading The Hair with amberis also by Edmund de vaud Interesting.
Our final two questions what sort of advice would you give a recent college grad interested in a career in either private equity or technology.
You know, I always tell them the same thing. I always tell them to do something else first. And I say that because I'm a great believer in domain expertise, and so I usually counsel younger folks coming out of school to go learn an industry and or learn a craft. Learn a skill, you know, be good at marketing, be good at sales, you know, be good at finance. Pick something where you're really good at it, because it gives you a cachet and a standing that you don't otherwise have.
H And our final question, what do you know about the world of private equity investing today that might have been helpful back in nineteen ninety nine when you were first standing up Silver.
Lake I wish I knew how important it was to be first.
Really, huh, that was interesting.
I think as an operating person, I probably intuited it and understood it because I kind of saw it around me. The advantages that a crew to a you know, a category leader, you just don't need to be as good, you know, think about think about Elon Musk. You know, his first electric car was a bundle of borrowed parts and components. It barely worked, It was hugely expensive.
Literally a lotus alon with laptop batteries.
With laptop batteries in it, wired together with you know, with soldering wire, cost of fortune, incredibly uncomfortable to drive, totally unreliable.
Got to start somewhere.
But he was able to do that for years and years and years and learn and learn and develop, you know,
and expertise and some skills. Same thing's true for if you think about it, Jeff Bezos right, selling books that no one wanted, losing money hand over fist for a decade, but building infrastructure, building experience, learning lessons, you know, creating a team that became the basis for you know, both of those things didn't work until they did, and boy, when they worked, They really worked great.
They really were. Thank you, David for being so generous with your time. We have been speaking with David Route. He is the executive chairman of Baypine, a private equity firm focused on digital transformation. If you enjoy this conversation, well check out any of the five hundred plus discussions
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