Hi David. Thank you for coming.
Great to be here. Let's start with the golf. Big source of capital for you and your peers. Some reporting this morning that they're pulling the financial plug on their PGA competitor LIV Golf. So they're obviously, you know, trying to figure out where to invest and they're going to have some big bills to pay. What are you hearing from your big investors in the region?
Well, you know, there's obvious concern. I mean, this is maybe something that local players feared but didn't anticipate was going to happen so quickly. You know, but it's an incredibly resilient and deep region and I think there's a long-term outlook that still prevails where there's a lot of growth, there's a lot of government investment. You know, in a somewhat counterintuitive way, you know, this crisis I think heightens the emphasis on energy resilience, which was a direction that many of the Gulf countries were already moving rapidly to diversify their economies away from oil, but also on defense and other industries that will need to be built up more rapidly. So I think coming out of this, you'll probably see a significant investment surge. And so while some are pausing right now to see how this will all settle out, I think you're going to see potentially something that's even stronger coming out of the crisis.
And what about it from a sort of human capital standpoint? Wall Street firms rushed in in what, historically speaking now looks like sort of a period of calm in a pretty volatile region. I don't know sort of your mix of expats versus locals, but it had been a hardship posting for a while and I think it was just starting to not become one. And I'm curious how you think about talent in the region.
Well, I mean, honestly, before this, it's really been a great place to have a posting and a great place to live. And I think it will return to that. We just opened up our office in Abu Dhabi. And you know, there's an incredible talent pool of folks in the region, outside the region, that want to work and live there. I don't really see that changing. There's a lot of things in the plus column around that. Not paying taxes. Well, there's some beneficial aspects to living there. It's developed a lot in terms of services and health care and mobility and all that. With the new Dubai airport, it's going to be the largest airport hub in the world. And so from the perspective of bringing capital, businesses that will invest there, the kind of flywheel that happens with those two things, it's not going to stop.
Okay. You're in the business of buying companies, making them better, and then selling them. And that last piece has been tough for the industry for a couple of years. IPOs have been slow, M&A's been picking up maybe, but a little more at the public company to public company level. Yeah, I mean, how real is the pressure in your portfolio? And what is sort of your honest answer to LPs who ask when are they really going to get their money back?
Well, I think it's first on the industry level, it's important to put this in the context of the cyclicality of this industry. You know, this is probably the fourth major cycle in the history of private equity where you had a significant peak period of deployment velocity that's happened kind of post COVID, a lot of money into technology investments. And it takes time then to digest that, particularly as you go through an interest rate cycle that we've gone through. Interestingly, it really hasn't been an economic cycle. The economy's been quite strong, but there has been an interest rate adjustment, as well as some players having overly concentrated their portfolio in some sectors like technology. So, the industry's going to have to work through that. But, we've seen it if you go back to the global financial crisis, you had liquidity distribution yields get down to 12, 15% level, kind of half of what you'd expect to see. But, then there'll be some investments that are cleared out that are not that good, marks will readjust, new players will come in. You see different creative forms of capital like flexible capital and we have a capital solutions business that's pretty active in navigating companies where you don't have to quite sell, but you give up some of the upside and you make your way through it and there'll be some losses in that for the industry for sure. But I think the cycle will come back. You know, we feel our portfolio is in quite good shape because we were investors in technology, but we were pretty anchored to the right level of price versus growth. We didn't overly concentrate in any sector. We did a lot of health care. We did a lot of industrial. We did a lot to add value to the businesses and so our distribution yields have been pretty good, pretty healthy and fairly normal. But we're watching it. LPs ask the questions and they're very, very concerned about how people are marking their assets. It's an ongoing dialogue for sure.
I mean, as you said, you know, software had been maybe 30, 40% of the industry's private equity buyouts over maybe the past decade. I assume it's somewhat similar percent of your portfolio?
So, a little bit less. Well, you know, again, this is where you have some definitional questions, which is, you know, what is software? And you have high-growth software businesses that traded on a multiple of revenue and you have very stable cash flow generating software businesses, some that are quite insulated against AI, some might even be accelerated. So, there's a stratification I think where lump it all together, it may give you the wrong image. And so, you know, I'd say probably in the traditional forms of software maybe like in the 20, 25% range. But importantly, we like a lot of it. Some of it will struggle, but some of it will actually be accelerated as you have some of these new technologies take hold. So, there will be a stratification that we're all going to have to look at.
What do you think the average mark on that is today versus where it was 6 months ago?
Well, so the marks have probably come down 20, 25% if you're looking at publicly traded multiples, but the really critical thing is where you bought these things. So, some invested at market levels, even premiums to market levels. Some invested with the notion that software multiples were going to adjust. And so, if you go back to before interest rates moved up, you know, we looked at a world where post the global financial crisis, we've been in this very low interest rate environment. Yet, COVID was going to present significant pressures to that equation with all the government debt and other issues. And so, we started underwriting significant expected multiple compression, not just in software, but in a lot of growth businesses because we did not think that could sustain. So, the question really is how much cushion did you have in the multiples in your marks? If you bought at peak prices, and maybe if you paid a premium to that, you have a much greater distance to fall.
But sorry, when you see private, you said public markets, you know, the software index is down as you say 20, 25%. Do you say, 'Oh, we probably mark that.' I mean, how tethered are you to a pretty comparable company that trades in the market every day when you look at your own private books?
It's not one-to-one, and you know, when we look at marks, we've got a valuation methodology that's similar to the way we underwrite businesses, which is what's the world going to look like 5 to 6 years from now, what's the operating trajectory of the business, and what's the right discount rate, you know, back. And that's not exactly how public market investors look at things. In fact, today, there's incredible amount of volatility in terms of buying and selling of stocks, overselling, overbuying, deep concerns over the latest news headline, kind of throwing the baby out with the bathwater. And that creates way more volatility than I think is anchored in true fundamentals. And so, we're constantly underwriting the business plan, the outlook, where we think it will trade 3, 4, 5 years out. And that may be aligned with a market drop or an increase. But I'd say the flip side is true, too. When the market, when the multiples go up by 25%, we're not marking them up 25%.
