David, always an absolute pleasure to have you on our SuperReturn International sofa. Great to see you.
My pleasure to be here. Thank you for having me.
We were just talking about how many years you've been coming to this and all those cycles that you've seen during that time. You always offer us an overview of the macro picture when you come. So, what are you seeing at the moment and what do you think is really challenging about this environment?
Well, it's a tale of two cities. We have a war in Iran that doesn't seem to be able to be resolved and we have an endless war, it seems, in Russia-Ukraine. And then you have the challenge that is now beginning to surface between China and Taiwan, even more so after the summit between President Trump and Xi Jinping. So, despite all of these wars or potential wars, the US economy and the global economy is doing reasonably well. In the United States, we're now having an enormous number of very big IPOs that are going to set all kinds of records. People seem to be doing deals at levels that we never thought before. So, on the one hand, the economy is doing reasonably well. Inflation is not out of control, but it's not perfect, but it's not terrible right now. And the GDP growth rates are pretty good. So, on the whole, if you're in the deals world, you're doing reasonably well. And if you're worried about the military situation between these various countries I've mentioned, you're not probably that happy right now.
So, it's a contradiction in terms, if you like, what you're describing. It's this really challenging environment but succeeding anyway. So, where are managers finding the opportunities and what are they having to do that's perhaps slightly different to the past?
Well, the big overlay right now is artificial intelligence. Everyone is obsessed with artificial intelligence. Can they get in the IPOs? But not can they get on the big IPOs, but can they find new deals that are new artificial intelligence companies that are going to be the next OpenAI or the next Anthropic? And that's what people are focused on. And also, whenever you do a deal today, people are focused on whether or not this company will be adversely or positively affected by AI. And of course, we don't really know. But that obsession about AI is overlaying everything going on in the deals world.
There's been a lot of discussion this week about value creation becoming even more important. So, managers having to roll their sleeves up a bit more. Is that something you're seeing and which levers are being pulled?
Of course, the early days of private equity, the leverage and the low purchase prices generally enabled people to make money. Today, you have to add value and by doing that you have to have managers actually how to bring EBITDA growth to the table. You have to do much more than just typically wait for the leverage to help you. So, it's a more challenging environment and fortunately for some people, the return expectations are a bit lower. So, to try to achieve 20% net internal rates of return is much more difficult and people or investors recognize that mid-teen rates of return net are probably a tolerable and probably not a bad thing in this environment.
You talked about AI. Are there other sectors that people are already focused on?
Yes, everyone has said, "Okay, maybe I missed AI. Maybe I missed the internet. What am I going to miss next if I don't get on top of things?" So, among the things that people are focused on is something called quantum computing. Quantum computing is a new type of computer that will really be a thousand or ten thousand times quicker than conventional computers and therefore help people make decisions more rapidly and hopefully better. There's also something called fusion. Fusion has been the endless search of mankind how we can actually produce endless energy and now for the first time ever people are taking seriously the idea that in our lifetime we might be able to produce some fusion.
You talked about fusion. Obviously, sort of different energy has always been top of the agenda here, something that people have been really increasingly interested in both in terms of risk management with energy and carbon sort of de-risking and also potential for what we see ahead. How important is that as an area now and how important is it to the end user that private equity is in things that are seen as constructive?
The concern about carbon and the concern about making energy clean has been one we've seen for the last 20 years or so take hold. I think it's been more of a concern in Europe than in the United States to some extent. Obviously, the current administration in the United States is not as focused on it, but everyone recognizes that carbon energy is a challenge and we need to do some things to moderate it or modulate it a bit and there is a concern that we should not address it by just saying, "Look, it's not a big problem. We'll worry about it later." People are trying to do something to address it, but it's not as easy as people would like and there is a concern that the United States right now, we're not really that interested in carbon reduction as opposed to previous administration, which were more focused on it.
So, that's sectors. What about different structures? Are you seeing a change in the way private equity looks for those returns now? Different kind of approaches in this sort of environment. We talked about people having to work harder for their money. Is structural change part of that?
