The Next Decade: How to Manage Disruption

hi everyone i'm scarlet fu with bloomberg television thank you for joining us for this panel we know the best investments often are made in times of stress and uncertainty the current crisis obviously is changing the way we live changing how and whether companies can survive and certainly how they go public as well how they raise money therefore getting a view of the big picture is absolutely critical so our focus this next hour will be how to manage disruption over the next decade we're going to focus on the trends and the opportunities that'll shape our future and our panelists include beth ferreira she is general partner at first mark capital which is an early stage vc firm beth invests in a broad range of consumer companies we also have greg lemkow who is co-head of goldman sachs investment banking but he's done just about everything at the firm including service co-head of global m a tech media and telecom and healthcare for the investment bank also two private equity titans chris stattler is managing partner at cvc capital partners he oversees private equity activities in north america and brian sheth is co-founder and president of vista equity partners now there are some disruptive headlines on the firm but we won't go there because it has nothing to do with our panel discussion today uh what i will say about brian is that he focuses exclusively on investing in software companies great to have everyone here and i'm so glad to be able to start this conversation with you i think where we want to start is i want to get a sense of your thought process as we look at the path ahead here because you never know what the future will bring but generally there's a framework that people use how do you think about managing disruption 10 years out when there's no visibility on november or 2021 and greg let me start with you because you're banker to companies and governments around the world what do you see right now yeah thank you scarlett it's great to be here and great to be here with my fellow panelists um i find it's actually sometimes easier to plan 10 years out than it might be 10 days out or 10 weeks out because you're so focused on the here and now but over a longer period of time you can take a broader perspective i look back at at my career at goldman sachs i started 28 years ago you know before there were cell phones and email and you actually had to go look at the hard copies of annual reports to get financials on companies and so much has changed since then but you would have never predicted it along the way but i think what you want to do is you try to play the trends i think there will be continued technological innovation i think the technological innovation we'll see going forward will be around artificial intelligence it'll be around it'll be around bots uh and i think in our job our objective is to try to get things to commoditize even faster uh to use technology as best we can and try to to focus on what differentiates us with our clients value-added advice and value-added judgments and really focus the efforts there and use technology and any advent technologically to try to drive change going forward i think over over a one year two year period it's hard to do that over five or ten years you can kind of look forward and try to see where you want to get to i'd say the other piece i'd observe is you know i don't think we've been through a period of more disruption in any of our careers than we have been in the past six months and so you know that experience of of instead of hypothetically saying god what should i do differently when you're forced to do things differently uh that's when you change the most and we look at we've taken 89 companies public since march um all virtual road shows so you can't go see investors you can't fly around the country like you used to we've we've sold 100 companies all with virtual management presentations so i actually find that sometimes during a crisis and during a major period of disruption is when you're best able to think about things like change because you're forced to not just do things the way you've always done them but have to do things differently and i think those are the kind of things we'll do differently going forward and those presentations hinge more than ever on the people who are uh really showing and sharing how they're thinking about things chris uh as someone who invests in private equity how are you thinking about the management teams and the resiliency that they show well actually that is the key word for us scarlet we've seen demonstrated uh the importance of that demonstrated over the past six months to greg's point is resiliency and watching people have to deal with something that they have never seen and probably never planned for never thought about and and what they're able to do we've been pleased by the reaction broadly of our of our management teams to figuring out how to protect value how to protect employees customers and then also how to turn it to their advantage and and see ways to bring forward some changes that we were anticipating on doing anyway and to greg's point move much quicker and so i think that's been one of the few bright spots of a period that we've been through is to see the reaction of our management teams that way beth i mentioned how you invest in a broad range of consumer companies how will the consumers wants versus needs uh change over the next decade yeah i mean i think that is a really big um question and we're still seeing that of evolution of what the consumer is going to want and need and how they're going to spend over the next two two to three years we haven't seen a huge difference in consumer spend in the last six months but there's so many different factors that haven't haven't come into play that we do think that come this holiday and beyond we'll start to see those changes um the nice thing about what we do and the earliest stages that we're thinking about those changes we're we're investing 10 years out most of the companies are are starting to think about what the the earliest um glimmers of hope or what our uh changes in the market are going to be and so you know we're seeing a lot of um new innovation coming out of this and we expect that there'll be continued new businesses whether it's how we consume media or you know how we how we shop how we interact with different people um in our social circles we're going to see a lot of different businesses come out of this and of course that internet interaction always involves software and technology brian as exclusive software investors what does this mean for how you project out your investments yeah thanks scarlett thanks for having me here and hey everyone um i think that all the panelists have made great perspective comments on what we're dealing with right now you know what chris said about management talent and battling through this time of adversity and being resilient is absolutely critical and software you kind of always plan for disruption you know that's that's to a certain extent our job we're not doing our job for our customers if we're not always coming up with something new and different and innovative as beth said and you know for vista companies which by and large are a little bit larger maybe a little bit more mature than you know traditional software companies when we think about what this new and incredible level of disruption is going to do for the next trajectory of growth what's been kind of fun for us is that you know these are one of these few opportunities where many of our customers are really thinking about how to take advantage of what's going on and make some major investments and perhaps advancing some of their digital plans so for one of the examples i'd give you is some of the talk around artificial intelligence and machine learning for example what greg was discussing are really getting put into action and it takes a tremendous amount of time and investment for example to invest in things like robotic process automation investment and automating certain aspects of maybe the most more commodity-like services that people are doing right now in certain companies and industries and companies after they're back on their toes and not on their heels like they were in march and april are really thinking in some cases now making those investments and they're really thinking about what does my digital business want to look like over the next 10 years because they can't wait anymore they can't pause on their investment software chris i wonder if you can share with us the best investment you made in the last crisis that paid off in a really big way and how your playbook is similar or different this time around well that's a great question i think i think one of the interesting things about times like this they're often uh characterized by great indicative value but nobody willing to trade and so you know we made very few investments in 2009 um despite making a tremendous number of of offers um you know personally the best investment we made was the only lbo that closed in the two in uh fourth quarter of 2008 for pilot travel centers which um does um fuel for for truckers and and everything else they need as well and that suffered greatly in terms of volumes during the crisis but it was a leading player that was actually able to take advantage of that disruption in terms of um the arbitrage that they were were able to um to get on fuel prices and then also just take share and so what they did was one of their competitors went bankrupt one of their largest competitors and we signed the deal to acquire them in 2009 when financing was still very very difficult and that was really the key to success of that deal this time around we're finding that a lot more difficult and we talked the other day when we were getting ready for this panel about the fact that everyone kind of knows that playbook it's like right after the recession or the middle of the recession there's great buys available well you know the fed made the the cost of money zero everyone remembers from last time and so it's been very difficult to find anything trading cheaper as a matter of fact what you've seen is just you know these barbells of real distress like companies that are completely out of business and do they need some rescue capital and then companies that have kind of sailed right through those are getting premium multiples and to the extent anybody wants to show a mark or get liquidity on an investment like that it's bit up to to prices that in multiples that were higher than just last year beth what about your playbook for this time around yeah i mean we're seeing the same thing um you know we initially came into this period thinking this is a great time to put some capital to work um after the you know three or four weeks that we were you know buckled down and making sure that our existing portfolio had the capital it needed and were in good places it was like we looked around and all of those companies that we thought could be great investments were either getting um the capital from their existing investors or just not going out at all um waiting uh waiting to get that capital or um or in the other case you know getting bid up so i think that the the playbook is well known and not only is there a lot of capital out there but they're realizing that it is a good time to invest and to lean into your existing companies all right so let's get to the elephant in the room greg and talk about the amount of capital that's out there because one thing that you had mentioned to me that's under-appreciated is just how much money has been raised and it's of course backed by the federal reserve by central bank support what are the ripple effects of sound companies financially sound companies that are more cash rich than ever what will deployment of those funds look like five ten years down the road it it's um it's a good point scarlett and i as i noted i think the story the pandemic from a market perspective has been the resilience of the capital markets and it's been the resilience really supported by swift action from central banks and from the fed so the money is the system's been flooded with money and what it allowed is for the companies that needed to raise capital to raise capital in particular in those early months of march and april and may the company is under most stress the airlines the travel businesses the cruise businesses the restaurants all raise capital and first it was investment grade and then it was non-investment grade that actually gave some stability to the markets and had the equity markets rally and the equity markets rallying has opened up the ipo markets and has driven confidence again around the m a market so the markets are functioning unbelievably well but as you say there's significant amount of capital out there as chris noted it is is practically free and the question is what happens down the road i think the good news in the mean in the meantime in the near term is we've got significant amounts of capital available for companies that need it to help keep the businesses afloat uh hopefully keep employment and keep investing in business i think that investment will continue and we'll see continued innovation we've seen you know accelerated growth in technology and biotechnology with the availability of capital it's been investing and accelerating change and innovation i think if capital can be deployed that way it'll end up being a very a very positive for the markets and the overall economy so i want to pick up on that point about keeping companies afloat because in looking at the fallout from all this excess liquidity it's pretty hard to tell a good company from a bad company when easy money gives every company the veneer of uh solvency when easy money impairs the fundamentals how do you go about gauging best in class companies identifying the right opportunities and brian since you're in software since you're looking at tech i'll i'll ask you that question first yeah you know there's there's a lot of ways to evaluate whether companies are running effectively and efficiently in software and technology a lot of investors really focus on growth and and for many investors that's the only thing that they like to focus on some of the metrics that are probably good to look at are you know how much are people spending on customer acquisition what's the return the long-term return you're going to get acquiring each of these customers when capital is is free as greg and as chris have alluded to earlier in the conversation you know it could turn into a like a free puppy over time and that you know they overspend on acquiring the wrong customers and then that ultimately hurts a company down the road so i think when you're evaluating these type of businesses and you're saying okay they have access to a lot of capital how are they using it and are there efficiency metrics around utilization changing uh if they're not how else are they using capital you know every great business should have a great management team and those management teams should always be thoughtful around when capital is available how can i spend it can i invest more and build better products faster or can i go buy out some of my competitors or some interesting companies in our ecosystem so that we can provide our customers more in the long term so that's how we really kind of evaluate whether or not you know there are great companies with great management teams but you can mask a lot of that if you're not paying attention or i should say you can mask a lot of it if other people aren't paying attention to the underlying factors that contribute to your growth do you see that in your part of the marketplace yeah and i think you know one of the um things that were alluded to earlier was that you start to see people paying for growth and paying for great management teams and i think this is the reason why and you start to see companies with good great unit economics with a sales cycle that really works and is throwing off cash investors want to back those companies and that's when you see these multiples get a little bit higher than you think they should be so does it matter at all if we're in a bubble with all this government intervention i mean there are a lot of questions being posed certainly when jay pal holds his news conferences people are asking whether equity prices are in a bubble if we're not in a bubble right now and we do get to one does that matter at all given all the intervention and given the fact that there will be continued support for years to come chris what do you think this is one of the toughest questions i remember early on in my career um i saw somebody definitively call a bubble who was the leader in the pride one of the leaders in private equity industry at that time of steady forcement and he talked about um what people were doing with with wampum and high yield and it was 1996 and he said you know i'm completely out and two years later it had just gotten better and he couldn't go back in and buy the exact same companies he talked about being too expensive at you know seven times back then nine times two years later so he plowed all his money into into mcleod and next lincoln and lost his franchise and the lesson for me was about um trying to call a cycle when your investors are invariably invested across asset classes and need to put money to work is really not the job i think they're asking us to do the job they're asking us to do is to put money out consistently across good companies to your point and so you know a bubble will define whether or not you're holding something longer it'll it'll influence your irr but if you make a good call on the underlying company and the underlying management team you're still going to be okay and i think that's what we're trying to do we're also trying to make sure that in a time like this when it is expensive you make sure you're taking advantage of that with your companies that are in a better position to exit as well so this idea that beth referred to about paying a premium for growth um why is the current disruption so bearish for any kind of value play what what kind of patience do investors have over the short term over the medium term for a value place to to come to fruition uh when money is so cheap and when there's no shortage of demand for for any kind of growth and beth i'll throw that question to you yeah so i don't know if there is a bearish on the value play i think there are a lot of investors that are sort of fishing for that you know um value proposition and don't want to have you know don't want to be in a bidding cycle with other you know investors so i think they still will get funded and i think that could be a great um a great strategy but i think the question is how long those people will those investors will be holding that asset and how long it will take to get to the other side of that investment yeah scarlett you know i just add on on the value versus growth because it's a it's a hot topic everywhere and i think that in a low interest rate to no interest rate environment there's just a premium on growth you can hopefully grow your way through it i don't think people are sitting around and saying oh my gosh my fundamental model tells me this is worth 20 times revenues but they're looking at rapid accelerating growth and finding when it can when these companies can grow into the valuations that they might expect i think the value investors are frustrated right now i was actually with a value investor the other day who who was almost bemoaning uh the existence of his industrial portfolio and saying he's starting to think that the only reason these companies exist is actually to buy software from high growth tech companies which which i don't think is their actual reason but i can see why an investor might think that some days talk about worlds well it's kind of issue it does bring an interesting point though because i think look um you know brian uh and vista decided to build their firm at a time when it was an unbelievable time to get into software i've been overweight software and done a fantastic job we've seen a lot of their companies um you know we didn't we didn't do that unfortunately um but we haven't suffered in terms of our own returns and one of the ways is to actually have those companies embrace the use of technology and to force them to to modernize their own business so some of our best successes are really taking businesses that are not technology companies per se but forcing the aggressive introduction of technology into their business we've got a convenience store retailer in poland that is by far the most sophisticated company i've seen in terms of what they put on their shelves and it's through artificial intelligence and a lot of data mining that tells them with a very small store i got to get it right and then they're constantly adjusting their mix and just an unbelievable company uh and on a gaming business called typical in germany that when we bought it it was mostly retail we pushed it aggressively to uh to focus on its online model and then we get into a situation where there is no retail model and so we've had a lot of success in in doing that and so there's those companies are still going to exist and they're really going to exist and flourish if they do learn how to take advantage of the parts of their business that are still less technology focused uh still you know person to person but they're going to be a leader in their sector in the use of technology well when we talk about value or things that are ignored whether it's industrial companies another area of the economy of the market that's that's ignored and uh is not seeing a lot of bids is commercial real estate and commercial real estate in big cities brian you were talking earlier in our call our preparation call that you hope nobody here invests in commercial real estate what is your what are your observations on on how things stand from software companies because there's a lot of hope that once we get a vaccine things will recover but i wonder if something's permanently changed for commercial real estate you're not making me a lot of friends outside of software today scarlett um i think that you know i can only go from our own portfolios we have 75 000 employees and as we've been talking to them over the last several months it's very very clear that uh big chunks of them are really comfortable in this you know remote workplace model you know with with some exceptions i think our employees with young families are ready to go back to the office and i think some of our employees are ready to go back to the office but i think everybody else really wants to um spend less time commuting spend more time with quality of work i you know greg had mentioned in our prior call people aren't going to get on the plane and fly for one day for a meeting anymore and i think some of these changes are going to be more permanent specific to real estate i think what you're going to find especially in southport technology is some of these areas in the country that have historically been the hot nuts for talent for technology uh places like here in austin texas perhaps and silicon valley and the route 128 corridor in boston they might be less important going forward because uh larger companies are going to be more open to looking for talent outside of where their headquarters are recognizing that employees can be productive and at least a lot of tech companies and other white collar jobs from wherever they sit the implications for commercial real estate i think at a minimum it's going to have to change headquarters offices are going to have to change what people want now is collaborative areas they want the opportunity that when they are in the office spend time with one another working on creative things they want inspiring i don't think people are going to go back to cues if they don't have to very soon regardless of how quickly we get monoclonal antibody therapeutics or vaccines or whatever it is that's going to get us back to pseudonormal i want to go back to the bubble point a little bit earlier on because we have an audience question here and i'll put it to greg given the amount of liquidity in the financial system which market has the biggest bubble if any in your opinion all right scarlett you tried to get chris to bite on the bubble question now you're trying to get me um this is the audience about me exactly i know um it is it listen it's hard it is hard to call i think as you look at the different markets today i won't call one a bubble or not it's it's relative value and i think people are looking at relative value and i think the reason the equity markets have traded up so highly and in particular the growth stocks have traded up so highly is it's relative to what you can put your money in the bank and earn nothing uh in some countries you can you can lose money by putting it in the bank um and as i think you're looking at relative value um that is what what compared to historical times is making these multiples look quite high but it doesn't feel like there's a there's a bubble in the market necessarily i think the thing that is happening around some of these elevated valuations is probably um a bit of an assumption of perfection and execution and so we've all seen the models you can look at the models of how these companies grow and if they get to a certain level of earnings and profitability in 2026 and you discount that back it actually is a very good value today uh the question is can it credibly get to those to those levels and i think people are putting less discount around execution and assuming more certainty and execution and that's why they're they're convincing themselves they're able to pay the valuations that we're seeing in the markets today okay well i'm going to throw another bubble question in there but it gets us to our next topic which is those special purpose acquisition companies um they're obviously the new shiny thing right now for 2020. chris do you think we're in the middle of a spack bubble and if so or even if we're not what does it look like on the other side when things kind of come back to normal will it inevitably involve a wave of private buyouts to untie exposure for investors as an interesting question and we've seen a lot of activity uh with these approaching our portfolio companies and i think greg said it passed the other day when we were talking which is that i think in my view spax came along because the process of taking companies public has been fundamentally broken for 20 years and so this was a way to try and do that in a more efficient fashion and address some of the issues with taking a company public it has it's created its own issues in terms of whether or not um that's a great way of doing things but i'm just hopeful that that through um through that disruption that we get to a place where there is a you know a better way of bringing a company public a better way of having an idea of where your value will be when you actually trade public um i think they will stay they'll be around um already you've seen a lot of innovation and some separation between people who are viewed as really adding value as sponsors and and those who don't bet i know your early stage vc but do you see more companies wanting to go public in this kind of environment or are they looking for other exit strategies well i think it depends on the company we have a company in our portfolio draftkings that went public about six months ago vs back and that spec was a great option for them it worked really well for where they were in their business and some of the regulatory challenges that they had um and it's traded it up and it's done incredibly well we have a lot of companies in our portfolio that are being um uh approached by by specs and you know we're you know i don't think it's right for all of our companies but it may be right for some of them so greg how do you think about the split between spax traditional ipos or even direct listings which we thought were going to really take off but actually haven't as much as you might have thought yeah chris touched on it you know my my hope and expectation is we'll see the path to taking companies public continue to evolve and taking some of the best elements of the traditional ipo of the direct listing and of the spec and each of them have great strengths and each of them have weaknesses i think the direct listing is is interesting for some companies but so far you've not been able to raise capital alongside it a lot of companies need to raise capital when they go public the spac works for a number of companies and the traditional ipo works for a number of companies you know the what's been fascinating this year we are on pace to have a record year for ipos in 2020 which is kind of amazing in the midst of a pandemic we've had 138 specs go public in 2020 raising 52 billion dollars that's been half of the volume uh in ipos in the u.s so it's it is it is a real alternative the structures have evolved to make it credible i think they will continue the markets feels like it's starting to choke on it a little bit from a supply demand standpoint and so it almost is saying sit tight for now and let us digest what we have i think ultimately as in everything there will be a performance differentiator and those sponsors of specs that do well and perform well and add value will be able to continue to raise money and those that don't will be one hit wonders and we'll come back to the market again and that'll be the shakeout we see but actually i'm hopeful that over time the market evolves in a way that there are now three paths to take a company public and the best of each of those three can work for each company brian how about you what do you see in the meantime um spax versus ipos you know i think one of the things i think everything greg said was spot on and one of the things about the spac is they they probably offer an alternative for companies that are growing quite as quickly and i think part of the reason why some of these facts are so successful is because they're sponsored by serial qualified investors and entrepreneurs who the investors in the specs recognize have great judgment around what a great company looks like you know it's it's it's one thing when you've never heard of someone who's raising this back or doing something like that it's a whole nother thing when it's someone like ben chu or bill foley or somebody who has been successful for decades and and has a great track record of being good after all and my guess is that they are not just looking for the 30 40 percent growers they're looking for great stable businesses that they're gonna want to own for a long time and because the economics of the stack there's an incentive for the sponsors of the spec to find those businesses that are going to be very resilient and really good investments for a long period of time because that's how they make their money so i think in the right space it's great alignment and i think that's what's going to make them you know continue to persist endure i think for some of the one-hit winners as greg said you know people will see that they weren't bringing great investments to market and they're not going to get re-up for the next one what happens though reputationally to investors with an institutional client base that gets stuck with a bad asset i mean how long does that stay with them for and chris i'll ask you that question are you speaking in terms of the sponsors of a spac or selling into one i i think well selling into one particular yeah look i i think for us when we think about selling intuit we think exactly the same way we do about an ipo um and when we care very much about whether or not the company we're bringing is one that is going to be straight with investors about their strategic plan and what they think they can do and ultimately deliver because we think more and more that that is going to help our record of bringing companies public and and be more successful and so um we evaluate the same way the difference is does the sponsor add anything in terms of getting it over the line is it a chin chew or a bill foley i think two great examples that i think do bring an awful lot of credibility to it and the other uh the other element of it that i find interesting is you are able to do it through a merger document so you're able to engage in a different selling process that allows for the management team to to do more with the potential buyers and and they have an opportunity particularly if you're doing a pipe as part of it to get a better uh and more certain allocation in a deal right and so that's the problem that it's solving and for us it's all about getting to that point where we've got an investor base that we want that has the capacity to buy a lot more that's high quality names and and that as we know doesn't happen until you're out there for for um three to six months sometimes longer but i think the spac process can can help you get to that sooner particularly if you're if you're doing um the pipe okay let's let's move away from our spac detour here and go back to some of the long-term issues and um i know that when i talked with each of you during the preparatory call the prep call we talked about some of the concerns you have as you look at the big picture and brian you had mentioned burnout and mental health is a big big concern with everyone working 24 7 no one in their office buildings but sitting at their kitchen table what do you do to ensure that your staffers aren't running on empty to to make sure that that mental health is uh a priority and stays a priority and and doesn't get compromised here yeah it's a it's a great question it's probably my biggest concern about our folks who are working so hard at this right now the the best way that i think about mitigating that is by making sure that we have the right people in place who are managing the experience of the mid-level and the junior folks who are working so hard so at vista we spend a lot of time thinking about who are the best culture carriers who are the ones who make the vista experience great not just from an investment standpoint but from a work-life balance a mental wellness standpoint and that group of folks has really done an amazing job and i was just on a call on wednesday for two hours with them and a bunch of our newer uh associates and analysts just talking about all the different things that they've been doing to make things fun and it's incredible i'm i'm too able to uh be as creative of these guys but it's incredible what they're able to do on zoom the fun games they play the the way that they communicate constantly the things that they talk about and how open they are with one another about the problems they have that is absolutely critical i think maybe folks my generation are maybe a little bit less open about the things that you know might be affecting us from a wellness standpoint and this next generation they do a really great job of expressing themselves and if they feel trust with um the folks who are responsible for kind of you know their experiences they're very good about you know having that dialogue and that so that's that's been really helpful for us but look i do worry about it um a lot of folks who are early in the in their career these six months which will probably end up being a year of of kind of zoom only work um is hugely impact to them and they don't have as good of a sense uh as much trust as maybe the rest of us panelists do that that things will change and get back to some version of normal which will include in-person interaction and a little bit more in person and so i think it's incumbent upon us who've been around a little bit longer to tell them this too shall pass we will get back there and in the meantime let's have some fun together and figure out some new and creative ways to interact with one another and get to know one another better yeah you touch on something critical which is nobody really knows to what extent any of these changes have taken place are actually permanent and what kind of snapback we'll get in terms of how people spend their time spend their money and and do what they need to do beth um wellness and mental health these are all very big even before the pandemic but now in the wake of the pandemic it actually has created a lot of opportunities and you talked about how there are opportunities in health care what do you see going forward yeah i mean so telemedicine and telehealth was on a growth trajectory before povid and now covet has accelerated that and so companies that have had created a product that can help whether it's on the addiction side or it's women's health or mental health which is democratizing the access making it much easier to get the therapy you need the prescriptions you need um over uh in this in this um modality and um we're starting to see that acceleration so companies we see a lot of new companies being created but also companies that actually have that product are accelerating really quickly so particularly in areas like you know i mentioned addiction addiction there's not enough treatment centers in in the us right now for those who have opiates or alcohol addiction or you know across the board and this will help open up the opportunities for people to get the help that they need and that extends to biotech as well greg i know that's an area that you were looking at as something that could really break out i think about probably one of the places we're most excited is biotech and i think it is possibly underappreciated notwithstanding the size deals we're seeing get done but i think the innovation that we're seeing actually true scientific innovation around gene therapy uh in the biotech landscape is accelerating and is is at a greater pace than we've seen over the past 20 years we've seen the past two years and i think that is only going to continue and as i look forward for the trends that are most exciting that we've seen the software wave of the past 20 years i think the next wave like that is going to be in the biotech world i mean the common thread here of course is technology and there's this deep deep conviction that technology will uh add to our processes will be a value add in every way to operations um but there are costs along the way and there are instances in which technology doesn't always deliver where and how do you see technology perhaps missing the market failing to deliver and chris i'll pose that question to you well i was uh i was on a uh zoom call last night with the um uh the the guy who made the the social dilemma movie and it was a really interesting call it was i think the uh a movie i watched it had the biggest impact on me in quite a while and and i think so socially in terms of social cohesion i think that's the place where technology has has missed the mark the most and i don't think there's uh that second place is even close and you know there was a hope and i think originally we did see more of it where it was bringing you in touch with more people and you were able to share with more people and that would would somehow reduce barriers make us all seem more alike and i think it's been taken over by forces that want to exploit our differences and it's additionally made people just more um you know socially uh introverted right and i've noticed that i noticed at first when i started interviewing um people and realizing that they were actually just um less uh uh they seem less comfortable with the process of the interview than uh prior generations because they're they're so absorbed in their technology you can see it when kids are in the same back seat of a car not talking to each other they're focused on their devices and so um i think that is the role for all of us going forward is to try and turn that back around and get um you know technology having technology help us bring greater social cohesion and teaching people how to limit it on on the first basis but also to to use it to bring people closer together that's a great point um technology digitization creates winners and losers and we've seen that through time but we've seen it also exacerbate all the existing inequalities out there and of course the acceleration of this process threatens to leave even more people more communities more constituencies behind so as as investors who invest in management teams um beth chris um brian how do you ensure that the management teams are addressing this properly and beth i'll start with you yeah it's something that is top of mind in most of our board meetings and conversations with our ceos right now is how do you how do you democratize opportunity across your your company um you know we've there are task force and and uh groups and support groups and smaller groups and and i think what happened through through this period of being at home um or working remotely has caused companies to actually raise their game from a communication standpoint and an inclusion standpoint so um so not only just from the standpoint of making sure that everyone is doing what they need to be doing and having the support they need but also making sure as we're thinking about adding new new people to the company making sure the funnel is is as wide as possible to make sure that there is um diversity at all levels of the company and including the board um and the and making sure that um the entire company or big parts of the company are part of those conversations brian what do you think how are the management teams you invest in addressing the the inequalities caused by by increased digitization and technology adoption yeah it's a big topic at vista we've made kind of vista level investments and i've been really impressed with how our management teams have responded and in some ways really gotten the conversation started so at the vista level we've made investments and kind of diversity training and uh diversity and inclusion hires to make sure that they are helping our portfolio companies implement systems that'll that'll at least uh make sure that our processes are better and are more open we started this a long time ago when we recognized that if we left it up to uh companies that operate in certain geographies they they tended to get you know really not very diverse um candidate pools they tended to look a lot like the people who already said and worked at the company and so we uh put a lot of testing methodology and a lot of personality processes uh evaluation processes in place and that really contributed to diversity of thought and diversity of look relative to the tech industry but frankly that's a really low bar and so now i think we're being much more aggressive in making sure that we're implementing new systems that are that get us our results faster and it's been amazing how quickly our management teams have responded and then like everything had just given us even better advice so our our playbook that is really just an accumulation of what's worked really well at our portfolio companies and they're they're nice enough to share with the rest of us and so we try to get back out to all the all the rest of the portfolio companies so they know what those best practices are and it's really been leadership from a number of our different companies mind body jam tibco sivan who who have come up with these great programs and really look at metrics around diversity look at metrics around gender look at metrics around lgbtq and they and they have open very open dialogue with their employees around you know how are you feeling you know what's the what's the tenor inside the organization are people comfortable with you know how we look and act and feel and work together and i think that openness and that communication that transparency is critical chris what about you you know i think look um our asset class has grown so much over 20 years and i know a big point uh that the milken institute focuses on and mike in particular is that we are much more important to the economy than we used to be i think it's kind of low to mid-20s in terms of the percentage of the economy that is is now owned by alternative investment managers and that comes with a responsibility and um the way we're looking at it more broadly is just to say when we need to leave these companies better than we found them and it goes without saying that we got to do that for investors but it's going to be a much broader report card and it's going to be the employees and it's going to be the customers and if we're not you know driving up the numbers of employees at our companies from when we when we started driving up the you know the the amount of economic gain that that they are sharing in then um then it's going to be a tough conversation that we're going to be having and frankly it's not a place that i want to work if we're not doing that and um i think it is going to be something we're going to we're going to have to do unfortunately our government is not um proving itself up to the task and and i think it's going to be our responsibility and of course this all folds into esg environmental social and governance overall um i wonder to what extent because of the pandemic in our response to the pandemic that we've kind of uh moved topics like sustainability and climate goals lower in the priority list how much are they on pause where does it rank in terms of priority greg how do you see company is adjusting their spending they're investing on on green initiatives on tackling this so um you know esg has been a massive theme really for the past couple of years accelerating in almost every discussion we had with clients with boards with investors and and i think it's it's continuing to be important but i'd say the thing that's been most most notable in the past six months is the e of esg had been the focus over the past couple years really focused on climate i think the pandemic has caused that to shift a little bit towards s towards the social part of it i think in the early days of the pandemic when the economy stopped and people didn't know if they would have jobs people didn't know if their businesses was gonna we're gonna make money uh didn't know if their communities were going to survive i had discussions with almost every ceo client on the social purpose of their company what what is their objective is it to maximize profits in that quarter or in that year is it to keep all their employees employed is it to invest in their communities when we saw the black lives matter movement and all the social unrest happen in this country in particular over the same time period what was the company's goal and objective against that context and i think it really pivoted in a meaningful way for most companies i don't think that shareholder primacy has gone away but i do think it's been mitigated somewhat in that companies and boards and ceos in particular and kind of authentic leaders in particular focused on what is the social purpose of their company and folding that into their overall objective of making money and so i don't think the climate goals have gone away but i think that s in esg has probably risen at the forefront more during this pandemic than the e had been prior to it is this a permanent shift you think or a temporary response given what we saw in the spring yeah i would say i think the the uplift in social good and social purpose of a company has been elevated and will stay that way um and and stay that way in terms of consciousness i don't think it will put the e or the climate part behind i think that is just too critical to the future of our planet end of mankind um but i think that one is going to need significant movement from governments as well as as companies to make that work okay so as we kind of go ahead oh sorry i i was just going to say i think that you know the pandemic has really opened people's eyes to the importance of the e part of the esb i agree with everything greg said but i would also add that you know people recognize that the pandemic itself may very well have been caused by some environmental issues that we need to constantly kind of face you know this kind of continuous destruction of wildlife and deeper forests uh eating and keeping animals where we shouldn't uh people are thinking about these things in ways that they weren't beforehand and now i have a lot of family in india and in bombay in particular um mumbai if you're not indian and uh they love they love what they can see right now outside their window they don't love not being able to go out because of covid but they're blown away by how clear the skies are and the fact that when they're on their porches they can breed the air and it's sparking conversations there about when things get back to normal what should the level of industrial pollution be like and should that be something that they all talk about and that is being spoken about at the highest levels of business and in india that means it's also being talked about the highest levels of government so i think that that people really are thinking about these things it's not just um there's a lot of thoughtful people especially in younger generations who won't work for companies who don't make this a priority and don't make it something that they actually care about and act on and i think that in this war for talent that we were in before and we certainly will be in again as soon as things come back normal a little bit more everyone is going to have to be more thoughtful about it because their company's priorities and values are going to have to match what the company's database looks and acts like i completely agree we've seen a uh a shift where that has become a ceo office issue as opposed to someone's responsibility um in a department who looks at this and and i think the employee base and the customer base are making it so as well as the investor base and so to the point that greg made before i think if you were behind on this and and you're focused on something else right now um maybe it's distracting you a bit but um kind of like with the the the paris agreements all the companies said we're going to keep working toward those goals regardless of what the united states does and and i think we're seeing continued momentum in these and critical areas despite the pandemic beth you want to jump in yeah i mean i think that the consumer or the end customer is going to demand it they're just you know the i think the pandemic has put a fine point on what's important what's important to people and the i think the whole esg piece is gonna is is incredibly important to to consumers so i think they're gonna make their choice by who they where they put their dollars where they go and ultimately it's instead of being a top down it's going to be a bottom-up decision and it goes back to that idea of what the business roundtable did to move the mission of a company beyond uh shareholder returns to addressing and including all the stakeholders i wonder as we start to wrap up our conversation here i want to ask what uh each of you what the number one question or the most frequent question that you get from clients is about managing through the disruption whether it's through this year or through the next five years or for the longer term through the next 10 years and greg i'll start with you i said the biggest question um that comes up with clients in the near term is when are you going back to the office how are you going back to the office how are you ensuring the safety of your people uh in doing so and how are you maintaining culture in this period when everyone is remote um and then the broader medium to longer term question questions the one you touched on earlier and uh others have spoken on is what does the future of work look like and does it look like what it looked like before will it snap back or not and it's you know it's been fascinating for us we're at a service business we've had the two i think two record quarters in a row in terms of productivity and performance when everybody's been working from home and it's it's unfathomable um and i think there's there's lots of challenges about working on wall street one had always been work-life balance i think people are actually working harder and yet getting better work-life balance they're turning their two-hour commutes they're taking an hour that and working with it and they're taking an hour of it and probably working out and feeling better and they're actually home at dinner time and so it's been fascinating to see the experience of a lot of people through this crisis i think the biggest anxiety is how do you are you burning off the capital of long-built cultures and how do you sustain that over time and in particular how do you in our business which is an apprenticeship culture how do you train that next generation and i think our instinct is we need to get people back together so they can be creative and they can collaborate i think that's right but i'd also say you know when i was going through school we used to get together in person and do study groups and i don't you know my kids don't do that they they do it via facetime and so maybe they can learn remotely maybe they can do it by zoom maybe they don't need to be sitting there looking over someone's shoulder to do it but i think that's the biggest challenge people are focused on is how do you train your next generation and how do you build and sustain culture when everyone's working remotely yeah it's gonna involve a lot of trial and error beth what about you what's the number one question your clients end up asking you about how you're managing through all of this um most of our companies are hiring quickly and so how do you hire when you're not meeting someone in person all of the the the normal conventions that we had of having you know lunch with someone or interviewing them in person in all of those visual cues and then once you're starting to get both people how do you onboard them how do you retain them how do you integrate them into your existing workforce and then what does it look like on the other side when you actually come back into the office i think that whole life cycle of getting those new new employees hired onboarded and then you know ramped up is the biggest question chris uh i think initially it it started with what we're doing with our portfolio companies what are we doing to keep our people safe and then the discussion shifted to how can you evaluate new investments what are you assuming for the environment for the next 18 months and how do you perform due diligence do you feel how much of it can you get done virtually and how much needs to be done um in person and and we found we can do an awful lot uh virtually and we and we've then been able to in the new deals that we've gotten this far with um create the conditions for a uh a safe in-person meeting whether it's uh you know outside or or properly uh socially distanced then you know i think that will stick in terms of um like a lot of these things we talked about i think there will be more people working remotely from home i think there will be um less business travel for that really difficult trip to just for for a two hour lunch and i think there'll be more diligence that is done more of the diligence process will be done remotely than it was before ryan you know all the things that the panelists said are spot on the additional thing that i think getting questions on is it's going to accelerate or decelerate the pace of innovation and march april and may were tough months for selling software and for our customers and we saw you know retention rates go up dramatically with our existing customers and we saw new logo sales go down we said wow maybe this is going to mean some sort of pause and kind of the pace of innovation and level of investment than customers are willing to make and then june it kind of took off and and looking at the numbers for q3 right before this eighty percent of our companies matter beat their pre-covered plan for sale so i i think this is actually going to accelerate it as we said at the beginning i think that um people have decided their companies have decided that now is too late of a time to uh made the investment uh made the commitment to digitize their business and they're going to go all in on what people like to call the fourth industrial revolution this this is going to be a digital economy and people can't sit on the sidelines anymore one thing that none of you mentioned and what the media what i end up talking about all the time is uh anything to do with politics who the next president of the united states will be whether there's going to be another round of fiscal stimulus i mean all the stuff that we spend hours talking about does this not matter at all because we're going to get an answer one way or another and you know people will just adjust companies will just adapt and we'll kind of move on because these are kind of bumps along the way greg yeah so i think you asked and answered i would say um i think it matters um but i think companies will adapt uh and no one's gonna predict which one is better or worse you know our research analyst put out a report earlier this week called the blue wave uh talking about what happened if there was a biden victory and everyone reacted said oh my gosh is goldman sachs saying biden's good for the economy it was it was saying if biden won and there was a blue wave there's more likely to be more economic stimulus and in the near term there's more likely to be actual uh greater economic growth as a result of that i think similarly there'll be benefits if there was a trump uh elect reelection and a red wave um but but i it's so unpredictable uh notwithstanding what the poll say it was we were here four years ago and the polls said hillary had a 91 chance of winning so i think everyone's going to stay out of the predicting game and instead being in the adapting game and figure out whatever happens i think companies are going to be nimble enough to try to adjust and adapt i do think the one piece that of politics that is relevant to the extent people think that there will be a democratic sweep and therefore likely changes in the tax code i think we'll see an acceleration of private company and potentially sponsor m a in the fourth quarter um as companies are looking to lock in gains uh ahead of any potential increase in taxes and that just plays right into the hands of this whole spac wave because those companies can close transactions quite quickly so that will be more of an offensive move or a defensive move depends how you look at it i think i think i think people will be looking to lock in gains when valuations are high and pay taxes at the current rates okay got it sorry let's let's adapt then and move away from politics um i wanted uh to check in with each of you to share one example of how you are experimenting with your job with your investments with how you approach your investments with how you approach uh going through uh managing everything that you need to that that you might have started off as a temporary measure but may actually become a permanent fixture of how you do things ryan let me start with you uh well i can tell you at vista that the the work from home dynamic is going to be you know a mix of work from home and in the office going to be a permanent one we've heard loud and clear from our employees that you know they don't love it all the time they miss one another but they really appreciate it some of the time and so you're we're going to see that and we're going to see that in our portfolio companies going forward and you know some of our companies not all of them but some of them uh congregate around some of these high cost of living centers in the u.s and what we've seen is a lot of our employees move during this pandemic to lower cost areas to areas that are more you know more beautiful more work life balance they're moving to the mountains they're moving to the oceans and and i think we're going to continue to see that distributed workforce that's probably going to be the biggest and most permanent change not only to vista but to our ecosystem and software are you moving out of austin are you moving to uh the beach no i i anticipated this 11 years ago and so i moved from san francisco to austin and i'm i'm gonna die a texan hopefully not soon but uh i love it here all right so that is a permanent future then beth what about you um yes we as a firm did up you know over a hundred events a year and um which is really important for our portfolio companies and the ecosystem to connect and obviously those are not happening now what we've moved towards is the much more specific industry um what we call guilds to connect you know finance leaders people leaders through all of these different challenges and i think that it might becomes the attendance becomes much easier for people because they can just you know log in versus actually physically going and the conversations end up being much more robust and much more targeted so i think we may actually move some of those events from person to permanently in the virtual world greg that could become permanent future yeah i would say the way we take companies public and the way we sell companies should should change dramatically i mean it's sort of goofy with the benefit of hindsight that you would take a management team on a plane and you go from boston to baltimore to new york to kansas city to minneapolis to try to raise money when you could actually just get on a zoom and see them all in one spot um i think that will change forever um i think that the investor road show will change and i think selling companies chris kind of touched on it from a due diligence standpoint but if you think about you want 10 potential buyers to come through and meet with the company so you have to schedule 10 sets of schedules over a period of time you've got to do 10 different management presentations it's crazy we now record the management presentation on video they can watch it each potential buyer gets a one-on-one zoom q a they can do the virtual data room you can do it all in a couple of days as opposed to over multiple weeks you actually protect confidentiality because you don't have potential buyers traipsing through the corporate headquarters um and it's much less taxing on management teams it's it's crazy to think we used to do things the way we did things and so things like that i think the necessary changes will become permanent and chris yeah i think um i would say in terms of the most impactful it's what brian said uh on the employee base and the much more flexible uh arrangements is between working in the office and working at home and then i think as best touched on um i think we'll see a lot less um physical travel right i mean that's i think the other part that is expensive a lot of low productivity time in there and also pretty draining on people uh if they're doing it a lot and so i think those two things will will be permanent changes or reduction in that all right good stuff thank you so much everyone thank you for taking some of your time to to talk with us about the disruption that we're seeing and how you're managing through this uh beth ferreira a general partner at first mark capital we've got brian sheth co-founder and president of vista equity partners chris chattler managing partner at cvc capital partners and of course greg lemkow co-head of goldman sachs investment banking thank you again thanks thanks everybody [Music] [Music] you

Channel: Milken Institute

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Length: 62min 14sec (3734 seconds)

Published: Tue Feb 23 2021