We asked a $18.9B Investor how to survive the AI bubble

15 years ago, we set an objective to become the number one performing private equity fund. Since we set that goal, the four funds we invested after that have all done 5x or better.

Yeah, it works pretty well.

Okay. I'll start with overhype. How about that?

I love it. Looking forward to it.

About 15 years ago we set an objective to become the number one performing private equity fund in the world as measured by MOIC, you know, the return on capital. And since we set that goal, the four funds we invested after that have all done 5x or better, or the fourth one's on track to do that. So it's been right. Like it's all the content that I try to bring to my talks or to the students at Stanford. You know, I like to think they're really based in stuff that really works. There's a lot of amazing people that have a lot of really good motivational content. I like to try mine out in the real world a lot and see what actually works. And I think that, you know, the stuff that I try to talk about is exactly what we do at Alpine. But yeah, we've had a really great run and I'm really proud of how we've done it, too. We've done it, you know, with people, treating people really well. We built our entire business around the people at Alpine and the entrepreneurs in our portfolio and, you know, try to be a force for good. The three goals are be the top performing fund, be a force for good, and be a place where the best people want to come and work and spend their careers. And I think hopefully we've done it that way.

That's right.

I mean from the day the first dollar comes in to the last dollar goes out. Yeah. Maybe it might be, it's probably easier to talk about, it probably averages about six years. The average investment is probably about six years.

So, I mean, private equity is a very broad classification. There's lots of different strategies. So, I'll tell you specifically what we do. I know there's a lot of talk around AI buy-and-builds, which we can dive into in a little bit, but we do primarily buy-and-build. So we'll find a really amazing CEO that a lot of times has worked with us in a smaller capacity. Maybe they were the CFO of a company we had or they came through our training program and then we'll back them. We'll go find an industry that we think is really interesting. We like the prosaic industries like the ones you mentioned, plumbing, HVAC. We also do software too because there's a number of strategies where roll-ups in software can be really attractive. So it's a small part of what we do though, smaller than the services stuff. But a lot of these really prosaic industries are massive. You know, the plumbing and HVAC industry you mentioned is like a $170 billion industry. So if you get it right and you actually figure it out, you know, you can grow almost forever because you just don't run out of TAM, which is why we like to buy-and-builds because we'll get it right once and then we'll stamp it out a number of times. The other thing that's really cool about buy-and-builds is it really plays to our core competence which is just talent, you know. So our buy-and-build strategy, the way we do it, really is a talent strategy. You know, in a lot of cases we're putting high-attribute, like military veterans, in to go run these plumbing businesses and they're just incredible leaders. And so our secret superpower is really training these awesome leaders and giving them an opportunity to do something they might not have had the opportunity to do otherwise. Sam.

That's actually right. That's actually a pretty simple, simplified expression. Yeah. Have Navy Seals run plumbing companies. It works pretty well. Yeah. The deck is only one slide.

The Navy Seal is actually a very common background of our leaders in these businesses.

So the add-on acquisitions, which is primarily what we do, I mean I think the average deal we did is like $30 million. So the company might have 15 to 20 million of revenue, something like that.

Yeah, we do. So once we get it going, we can usually finance all the acquisitions with cash flow and debt. So we don't have to put in any more equity. That's important. Obviously, if you're trying to have a high MOIC, the not putting money in part is a big part of that.

No, Sean, you nailed it. It's like a search fund where we try to improve on the search fund model. Like if you think about a search fund, and for those who may not know, you know, a search fund is you're backing a young person to go buy a business and then they're going to go run it. But the thing where it kind of falls down is the first part, which is someone has to go source and buy a business. They have to go build an entire private equity firm to buy one company. So we do all that ourselves because we are obviously doing this on a repeated basis. But the general part about having a really high-attribute person betting their career on a business is a great formula. Probably a lot of what you talk about on this podcast. I mean, it's the greatest formula there is. So we love that part of the DNA of a search fund model. We're hiring very similar kind of high-attribute people, maybe a little bit older than the search fund, a little more experienced, bigger businesses, but generally it is what you just said, Sean. It is kind of like a superpowered search fund model.

Exactly. And then the other thing is once you bought 10 plumbing companies, you know what it looks like to run the best in the world because this one company might do really well on training. This other company does great on customer acquisition. This other company has a purchasing advantage. This other one has a training.

Exactly. You grab, and usually that's true. Usually each company has a superpower. But after let's just say 10 deals, you've got all the superpowers, you know, and now your next deal, your 11th deal has 10 superpowers. Often you can improve that business dramatically really fast just because you take that playbook. And the reason you can make that playbook consistent is because you're putting your own people in to run it. This took me 10 years to figure out, but we would back founders and then say, 'Hey, we have all these great ideas.' And the founders would just smile and write stuff down and never do anything, you know, and that's not that we don't love founders, but you can't, you're not going to buy a guy who's run a plumbing company for 35 years and then, you know, come in and tell him how to run his business. That doesn't work.

Yeah. Well, first of all, thanks for the kind words. I appreciate them. But I grew up in a small town in Ohio. Went to a public school and it was a blue-collar town outside of Toledo called Perrysburg. Nothing special about it. And I was probably just average in just about everything. Athletics, school, and this isn't false humility. I mean, this is actually, I didn't make the basketball team. I got cut, you know, from the wrestling team. I mean, I just wasn't really, and I was okay at grades, nothing special. And just as you said, Sean, you know, I was mowing lawns and the Sony Walkman came out and I started listening to tapes by guys like Brian Tracy and Tony Robbins and Earl Nightingale and guys like that. And so you're, imagine you're like a 14-year-old kid and you're literally and figuratively, I'm brainwashing myself with this content because I listen to so many hours of it walking back and forth. And the two big concepts, the first concept they said was you're either going to be your own best friend or you're going to be your own worst enemy. So you figure out, first, you know, like you think that the world's happening, like for example, you think you got cut from the basketball team and all this stuff happened externally, but really it's, you know, and that was a very hard message to hear because I was like, wait, what do you mean? I had all these excuses lined up like I wasn't tall enough and I hadn't started playing early enough and my parents didn't get me in wrestling early enough and all this stuff. It's like, nope, you don't get to have any of that stuff. You got to, it's like, you got to get rid of all that and just, you got to accept total accountability for your life. And that was absolutely brutal. And I realized they were talking about me and I wasn't doing that. And I was exactly who they were talking about. So if the first thing is kind of get out of your own way, the second one was like figure out what you really want. And I give Brian Tracy the most credit for this about like how to set goals. And I think he maybe the best, you know, at least back then was the best in the world at setting goals. And so I literally would write down my goals every single day, multiple times a day, in high school. And it was just incredible the combination of those two things. It's like a pretty undefeated formula, you know, get out of your own way and don't allow yourself to make excuses and then write down what you want. Be super clear and then obviously you got to go do the stuff you write down. But that formula was like really powerful and there was just something in me, I guess, that wanted more than what I had. And so I just kept plowing through and then the story is definitely not even close to linear. I mean, everything you could imagine goes wrong, you know? I mean, I wasn't great at wrestling. I cut a ton of weight in wrestling. I mean, I was 125 lbs at 6 feet tall. I mean, do that math. And then with Alpine, I mean, our first fund lost money, drained my savings account. Then we started clawing our way back, got smacked by the Great Recession, drained my savings account again. You know, so it's definitely not been a linear story at all. But I think that the story is just one of like being clear about what you want and then just this crazy amount of like persistence.

Okay, I'll start with overhype. How about that? You know, I graduated from business school in '99, which was like, it felt like this exact time right now, but it was the dot-com era. That was the time when you had like petfood.com and Webvan and all this nonsense. I think there were 400 companies that went public and the only one that I'm aware of that survived was Amazon, maybe eBay. But it was like, it was a bloodbath. And so people were right that the internet's going to transform the world. Look at us right now. We're on a podcast having, you know, over Wi-Fi.

And you know, you think about today, I mean, your mobile phone and you think about like, imagine just your Wi-Fi doesn't work for a week. Good luck, you know, like that. So it transformed the world more than people could even imagine back then, but there was a lot of like false starts and hype that people didn't really know where to place it and they kind of misplaced it. I think that's kind of where we are in AI. And my example of, I'll just back up, I think there's kind of four places you could play in AI. You could be in the infrastructure layer, which is really, you know, all the chips and data centers and energy and, you know, that's a very exciting area that's going to have growth for as long as we can see. Then the next is the large language models. There's really not a lot of those. So, you know, I don't know that you can really play there unless you're a big business. Even investing in those, like you're already paying a price that assumes success for those. So I don't think that's really that interesting. Then there's the app layer, which is where kind of all the, most of the venture money is going. And then there's the use case layer, which is you're a customer, you know, like an HVAC company and you're going to use AI. And I think, and that's, you know, that's why I think a lot of these venture firms are jumping into these AI rollups because they're realizing that the first three layers are kind of tough and they're going to play in that fourth one. But where the hype is, is the third one, which is the apps. You know, I'm going to be an app that I'm going to help law firms settle their cases faster or I'm going to make call center software that's going to allow you to not use humans or I'm going to whatever. I mean, there's a million of those applications. I think that's where a lot of the hype is. We see all these companies as vendors to our businesses. So they're pitching us all the time, these venture-backed apps, and they'll have 2 million of revenue and a $500 million valuation, and they're going to go to zero. Like they're going to be worth absolutely zero.

I think that you have to say like ultimately what's the barrier and what's the moat that they're going to be able to build? There will be apps that will be successful just like there were dot-coms that were successful, but they're going to get attacked by above and below. You know, they're getting attacked below from the companies that can have, now they can build their own stuff. They're getting attacked also from the LLMs who are introducing interfaces and new products that are like literally just taking the business of some of these apps. So there's going to be this constant pressure on them. I think if you can build proprietary data sets, which is harder than it sounds, or you can build really deep interfaces with your customers, which is also harder than it sounds, those are moats you can build. But really, I think sometimes what you're really, you know, you might be six months ahead of where the LLMs are going to ultimately go and that you can make a lot of revenue for a short period of time. Again, going back to the internet. There was a ton of businesses in the, you know, 90s where it was like get your marriage license online and those businesses made a fortune and they grew really fast. Hundreds, I mean, they were growing at 100% plus a year. They were until Google just absorbed all those rents. You know, it's like that. And that's a little bit of like the analogy of the LLMs, I think, absorbing a lot of the rents. So I'm not making a blanket statement that all apps are going to fail. I just think that's, you asked where I think things are overhyped. I think that's where they're overhyped.

I think the reason that people are approaching the strategy is because they're probably seeing a little bit of what I was describing about the app layer and saying, gosh, I'd rather be the person using the AI than someone, you know, developing it. So I think that's why they land in these AI rollups. I think you got to be careful. I mean, we've been doing rollups for 15 years and AI is a huge thing. It's important, depends on the industry, of course. Some industries, AI is a much bigger factor than others. But the other basics of like getting the talent right, getting the companies right, integrating, doing the transition management, having your workforce stay on, you know, doing training, recruiting, those are really the core elements. The technology, I mean, here's probably a hot take. I think the technology in many, many industries is going to be commoditized. You know, like I'll give you an example. I'll give you a real example in property management. We happen to be in property management. I know there's been a bunch of AI-native rollups launched by venture firms in property management. What technology, like what's their real advantage? Like are they going to have technology that's better than anyone else? I would say the answer is no.

And exactly, like the moat in property management is all the stuff I was mentioning before, you know, hiring well, building, you know, good cultures, retaining, recruiting. But the technology, at least in that particular segment, is going to come through the, I think the software companies are going to, and so we're all going to have access. And this is my take, you know, this isn't, I mean, there can be other opinions on this, but I think ultimately, I think most people are going to have access to the same technology. So it'll be a tool and it'll help everybody, but it's not going to be the thing, you know, it's not going to be like the real differentiator. And so I still would go back to say if you want to win in AI rollups, you got to win in all that other stuff I was saying.

I think that's the thesis, like what you just described is the thesis and we'll, you know, we'll see how it plays out. We'll see, like I'm sure there will be some people that execute really well and have some version of what you said. It probably won't be as dramatic. And then it's just like where the rents go and do that, you know, just how much that rents ultimately get passed down to the consumer. I don't know that you necessarily win on technology per se.

I would say, if I were graduating right now, I mean, knowing everything I know now, I would go do a services rollup because I know how to do that. It works really well. I think AI is a tailwind. I'd do that in an industry where you can build real moats and stickiness with the customers. Not all industries allow that.

Like take wealth management for example. You know, if you go into that business, you're like, 'Okay, I'm helping people buy stocks or whatever.' But what if you were helping people buy stocks and you were doing their trust and you were doing their taxes and you were helping them with all their estate planning and that's your moat against AI. It's old-fashioned stuff. It's your moat against AI is like the deep, deep relationships with your customers. So I would say go into something where you can really build those kind of customer moats and then AI is nothing but a tailwind for you because the customer doesn't care how you're doing your backend, you know. But I would just be playing around with that. I think it's like it's going to be a language that I would advise anyone, no matter what age you are, but it's certainly if you're a young student graduating, like you want to know that language extremely well. You want to speak that language because that'll also allow you to look at an opportunity and say, okay, I know I could do this with it because I'm so fast all in these tools.

Yeah. You know, like if I had to keep it really simple, I would say like let's pretend for a second that I wasn't interested at all in being a force for good and I was just interested in generating returns. I'd run my business exactly the same way. A lot of it is for me is like it's having the confidence in building something that's going to be durable and enduring. So like I'll use a real example. Let's say that I have this strategy. I won't use any names, but let's say I'm a software buyout firm and my strategy is I go into a business, I buy a software company, I fire people and I double price. I'll make money in the short term. But you look at a time like now where AI is coming, like you really want the companies that are going to win in software have incredible teams that are on top. They're making, you know, agentic products on top of their software and they're going to have AI be this incredible tailwind for them. And you know, if you just destroyed your team and your cost structure, you're going to get attacked from both sides, from your customer side and from, you know, the LLM. So we found that building things is a lot more durable than ripping things apart because you can make like one and a half times your money or maybe even two times your money ripping stuff apart if you're lucky, if you time the exit just right. But if you actually build something, time's your friend and it could be, I mean, you can make a hundred times your money. And so like I do think a lot of it is time horizon. I think underneath that is even deeper. Like why are you in this business in the first place? Like if your goal to be in the business is to make money and you want to do it as fast as possible, then maybe that behavior does flow from that. But in terms of just being good at private equity, I don't think ripping things apart, I don't think you're going to be the best in the world, you know, doing that.

You know, we've had a few really, really good ones that rhyme with what I'll describe, but you know, you picked the plumbing and HVAC example at the beginning. That's one of our best deals. I mean, we backed two people that we hired right out of business school. They joined our CEO-in-training program. They went through that program. They became eventually the co-CEOs of the business. We bought a small plumbing and HVAC business that had like $8 million of earnings. This year that business will do $500 million of earnings.

It took six years.

$500 million of earnings, not...

Three billion of revenue, 500 million of earnings. And I think importantly that happened without us putting in any additional money.