Orlando, great to have you.
Great to be here in New Jersey with both of you. I actually love it here.
Let's switch spots because you're in Miami. We're happy to take the show down there. We love the state income tax rate.
Let's do it any time. It's great.
All right. So 4.94% — we're probably going to hit five. You're a professional investor. I know you don't trade bonds, I get it. But will 5%, or even a little higher than that, kill the markets, kill the economy, kill private equity?
We're already getting hit pretty hard because we're in software. So given people's lack of understanding of AI and software, we're paying — in our companies, 80 companies — we have to refinance already $20 billion of debt in the last year and a half, and we're paying spreads that are 150 to 200 basis points wider. Does that kill us, or kill the economy, or kill software? Absolutely not. Because as owners of companies, and that's how people adjust, we just have to cut more cost or grow the earnings more through innovation. So we adapt to that environment.
Now, we all know, and this is well documented, that we have a problem in this country. Meaning the U.S. government and its deficit. Because the president was talking about this last night — almost saying what company wouldn't, when it's doing this, issue a $5,000 dividend check. You look at the P&L of the U.S. and you don't think it looks so hot? No. The P&L of the U.S. — we're almost at a $2 trillion deficit. It's expected to increase over the next five years, and not only increase, but also on a relative basis as a percentage of GDP. We're almost at 6% on deficit, and it's expected to increase to almost 7%. So that has to be dealt with.
Now, it's really, really, really difficult to fix the spending and tax situation. But on the growth side — and that's what the government is trying to do — trying to grow our way out, spur economic growth and GDP growth. Then you have people saying stronger growth, which is what we've had — 6% nominal the past couple of quarters — is why bond yields are rising.
I'd say that a little bit. But that doesn't explain the rest of the world then.
No, it doesn't. Because they don't have growth — they have higher bond yields than us, or at least higher rises, and no growth. What's going on in Japan and France? Look at what's going on. But to that point, there's a little bit of a doom loop here. The better the economy does, the more the bond yield goes up as a result, the bigger the deficit gets. So even trying to grow our way out is a little bit tougher now than it used to be.
And that's why we're in software and technology?
Because the way out of it is through productivity growth — not wage growth, not nominal inflation — good old-fashioned productivity growth. And that's what this AI build-out is so critical and so important for. And the government is looking at those yields because that build-out is very dependent on a set of rates and a stock market level to continue to fuel it. There's a lot of money going into it. So once again, productivity growth is the key way out of this.
So we have a guest coming up also in a few minutes — Paul Prager of Terra Wolf. He'll talk about building out huge power plants in places like Kentucky. Let's forget about your employee base for a second — obviously very well educated, probably very well compensated. Is the AI build-out — and I'm talking about carpenters, electricians, concrete people, everybody built into the build-out — is that inflating incomes enough to overcome the impact of higher rates, higher gas prices, higher insurance, higher health care, higher everything?
No way, no how, not yet. The input costs, including the massive increase in oil prices, are going all through the economy now. We have 80 companies doing about $35 billion in revenues, and of course these are knowledge workers — developers, salespeople, support people. But we're not seeing that massive wage inflation right now that we typically see. We're also not seeing ourselves having the ability to increase prices massively to our customers. And house economic activity as we see it, because software can be quite cyclical — customers can always wait a quarter or two for a productivity gain to perform a project. Our customers right now are buying a lot of product. We don't see any big decreases in what they're willing to spend. So there's a healthy aspect of the economy that we're witnessing.
Well, let's talk about the unhealthy ones still, because we just got the results of the Treasury's buyback. This is the supersized buyback of 10- and 20-year debt that just was conducted. Rick Santelli brings us those results. Rick.
Well, I'll tell you, it's different than a regular auction — it's a reverse auction. And the amount accepted was $5.19 billion. They could have gone to $6 billion. There are a couple of metrics that I find very fascinating. When I do regular auctions, I look at bid-to-cover — how many dollars worth of bids compared to how much was available for sale. When you do a reverse auction, you call that offer-to-cover. In this case, $10.489 billion were offered for sale; they accepted $5.19 billion. So if you take $10.489 divided by $5.19, you get 2.02 — that's the offer-to-cover. It's weak. Most reverse auctions you're looking at two and a half to three as normal, which means that the sellers threw out about $10.5 billion worth — it should have been closer to $15 or $20 billion. They weren't aggressive in that regard. And the fact that they didn't go up to $6 billion probably means that the Treasury thought some of that stuff was a bit too expensive to buy. So if I had to grade this auction, it would be somewhere around a C, maybe even a C-minus. Now, it doesn't mean the Treasury did anything wrong — I'm looking at it in its entirety. The dealers in the first one just seemed a little gun-shy throwing it out there, or they don't really want to sell it back at these levels. It's a variety of potential reasons. I would venture a guess that the next one of these we get — I think on the 24th of September — you will see that much more is offered by the sellers. That would be my prediction.
Or, Rick, is it a sign that there's just not that much demand for this? In other words, it's actually kind of a good sign, right? People are like —
Yes, no, it's a good sign. It'd be much worse — it's kind of like an IPO. You want an IPO you wanted to buy, right?
Exactly. And the sellers were reluctant.
A hot IPO, you would say it's five or six times oversubscribed. This was like two times.
Yeah, exactly. So when I say it's an average one, it's nothing against the Treasury, nothing against Bessent. It's that the whole process wasn't found to be super valuable to those on the sell side.
All right. Let's see what Orlando thinks. Rick, thanks very much — Rick Santelli. Do you have a response or reaction to this? It's kind of new — I mean, they've been doing this for a few years, but it's getting more attention.
It's getting more attention, it's bigger, and there has been a lot of criticism — it should have been a lot bigger, oh it's not going to move the needle, oh there's a fiscal problem. Sure, many of those factors could be true. But if you have tools at your disposal to manage the balance sheet, go for it. I think it's astute — lower those long-term rates, or try to buy short. And there you go.
Is there anything the government can do? Because the bond market is going to — and no disrespect to the Federal Reserve, they've got a meeting next Wednesday, we'll be in D.C., could be a shocker. I just don't know what the Federal Reserve can do right now. Orlando, $100 oil because there are conflicts in Russia-Ukraine and Iran — I have no idea what an interest rate move is going to matter to that.
I mean, what would you do if you were the Fed chair?
Well, I don't — I'm not looking for that job. Leave me in private equity. I really, really love what I do, grinding with these companies that are great in software. This is super, super complicated. But look, we probably have a rate hike — those are the odds right now. Europe just had a rate hike. But yeah, it's a supply problem. People talk about dollar debasement and all the rest of it. I will say that technology is the one thing that has helped. Can you imagine if ChatGPT hadn't come along four years ago? I mean, truly, where would we be in this economy and the stock market? We had a horrible stock market year in 2022. So yes, it's been disruptive, but this has also been one of the biggest — I mean, you talk about productivity. You would say AI has it.
Look at the massive AI build-out. Look at the productivity that's coming — that hasn't really even started in corporations. Look at these awesome IPOs, trillions and trillions of dollars. That is a big boost to the economy.
Yeah. All right. Software has been on a very good run lately. This is well-timed.
I'm so happy I'm here with that timing.
I know. That's the next block, so we've got the whole next block.
Welcome back. Orlando Bravo, the founder and managing partner of Thoma Bravo, is here on set with us. We want to talk about your core expertise, of course, which is in tech. Your company is one of the largest software-focused funds — $170 billion, I think we talked about, assets under management, 80-some different businesses — and a tough moment for software as a service with AI coming on the scene. You're quite positive about AI, but it has been disruptive. So what's the state of play for all of these companies in your portfolio?
The first state of play, which is really important — and you see it out of the big-cap companies, those great companies, Salesforce, ServiceNow, and some others with great leadership — the fundamentals are excellent. We just had this meeting yesterday with all of our key investors, and one page after the other: growing at 20%, high retention rates, high net retention rates. Now, that is only part of the story of what's happening today. But when you look at these companies now versus two years ago, they're now AI-centric companies. We have a public position in SailPoint — they reported earnings yesterday, it's all public — 30% of their new ARR was all AI. AI is one of the biggest, most positive things that ever happened in software. So the market got it exactly wrong.
No question. Exactly wrong — 'it's going to destroy software.' Your take is, and what investors appear to have discovered the last couple of weeks, is no, no, no, no — software will benefit.
