00:00We were showing a really well-read story on the Bloomberg about any participant in private markets after an era of easy gains is now changing approach.
00:08Is that true of you and what you're doing in your strategy?
00:11Well, I think for us, similar to what we've seen over the last multiple decades, is companies are just staying private longer.
00:18Right.
00:18And as that happens, then the historic returns and public market investors would have gotten as companies went public and then appreciated in the public market.
00:26Those are really only available, those returns in the private market, as those companies continue to grow.
00:32So for us, it's more of the same, continuing to capitalize on that trend and apply the kind of full picture of Wellington, which is seeing the public markets and applying that knowledge to the private markets.
00:42Matt, across infrastructure projects largely relating to AI and M&A, debt is in the headlines on a daily basis at the moment.
00:53Different types of mechanisms.
00:56I'm trying to understand how worried or not private market participants are about the use of debt.
01:03Like the CLO market must be like, this is great.
01:06The M&A market is claiming it's the connective tissue issuance giving life to it.
01:11But others are saying this is really worrying.
01:14I mean, I think the amount of leverage we see being deployed as CapEx expense for AI and all things AI continues to increase.
01:21I think that the debt service for that will be wholly determined by the revenue streams that AI in general is creating.
01:30And so assuming AI continues to deliver on the dream and continues to deliver on the revenue forecasts, then I think that that leverage and that debt is probably okay.
01:38But obviously if the secular shift in AI doesn't actually result in the revenue that people are expecting, then that over-leverage will be a challenge.
01:50So what is your base case for whether we meet the hype?
01:55I think we believe that AI is a once in a decade, maybe once in a generation technology shift.
02:02And that as a result, a lot of this leverage and a lot of the debt that's put into the system actually will be fine.
02:09I would say I think our take is really that this trend of companies staying private longer does have implications for the availability of AI businesses in the public market,
02:19which is, I think, a really interesting topic.
02:21Well, let's delve into that topic.
02:22If we look at your portfolio, we can see the companies that you did back from an early stage and, well, a late stage growth area in the private markets
02:29and have successfully gone public, most recently Klarna, but Airbnb, a firm.
02:34I'm also thinking about the ones that still haven't gone public.
02:37Stripe, I mean, massive company that many would have thought would have gone to IPO and hasn't as yet.
02:42Databricks, just a $100 billion valuation.
02:44When is it likely that the IPO market will open for these companies?
02:51Is there just too much to be gained from remaining private?
02:54Look, we've just had EA return to the private markets if the deal goes through.
02:57Well, I think there's two ways to answer your question.
02:59The first way is to say that over the last three years, we had a historically low period of IPO activity.
03:05You all talk about it on the show all the time.
03:08Q3, there were 13 venture-backed IPOs.
03:11Those companies raised $36 billion in the public market or have a combined market value of $36 billion.
03:19That's 3,000% more than happened last year at this time.
03:23So the IPO market is absolutely coming back and we're starting to see signs of that.
03:27If the SEC is open for business.
03:28If the SEC reopens, that will throw a wrench in companies like Navon, companies like Ethos, companies like Wealthfront that have filed their S1 and are waiting.
03:37The SEC is not open for business, so new issuances will be down.
03:41Matt, has your definition of a late-stage growth investment changed?
03:47Definitely.
03:47How?
03:48It has because companies stay private longer.
03:50I know, but to be fair, you've said that before.
03:53I'm trying to understand what specific company fits your profile right now.
03:57Yeah, so let's talk about Databricks, which I think is a great example.
04:00When I started a decade ago investing in late-stage private companies, the idea that we'd be investing in a $60-plus billion, now $100 billion private company was really hard to wrap my head around.
04:13But as companies stay private longer, the larger companies are just commanding more market cap in the private market.
04:20And that's a big, big change from where things were a decade ago.
04:23There was no $60- or $100-billion private companies 10 years ago.
04:27Today, we sit and we can count a dozen probably of them.
04:30What's interesting is Wellington does well in both scenarios, as we said.
04:34And you haven't exited yet Klarna because Klarna goes public.
04:39You still hold, but there's a lock-up situation.
04:41Eventually, maybe Wellington on the $1.3 trillion assets on the management side starts buying that up in the public markets.
04:46But when is it that you decide to exit from the late-stage growth perspective?
04:51Is it always when the lock-up expires, how long do you want to ride these companies once they do go public?
04:56For us, we think about holistically as a firm, where the return characteristics for a specific strategy lie, and are we able to achieve those return objectives?
05:08And so oftentimes what will happen is one of our companies on the private side will go public.
05:13We will have generated sufficient return to what we underwrite to.
05:16That may still leave plenty of opportunity for the public market side to be buying.
05:20And it's that combination of, again, as I said before, seeing the full picture of here's how they operate in the private markets and how they executed.
05:28And here's what we believe can happen in the public markets mean that although we may be selling out of the private side,
05:34our $1.3 trillion on the public side may be potentially buying those companies in China.
05:38Really quick, we broke the story in July, SpaceX at $400 billion.
05:42It was a tender, secondary.
05:43As a case study with your assets under management, can you even get into something like that at that valuation and at that stage?
05:50The answer is yes, assuming that we think that the return potential is there.
05:55And I think one of the really interesting trends is companies stay private longer is really to highlight the fact that perpetually private for the vast majority of companies is not a thing
06:04because the volume of liquidity in the private markets is not sufficient to give employees, founders, and investors return of capital that they need.
06:14The best way to illustrate that in my mind is to point out the fact that the entire private market transacts in a year volume, that equals five business days of trading in the public market.
06:27So all the private universe transacts in just five days in the public market.
06:32So liquidity in the private markets isn't there to stay private forever.
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