HIGHLIGHTS: Mala Gaonkar - Founder of SurgoCap Partners

0:00Hi, everybody. Tune in to this short version of the podcast, which we do every Friday. For the long version, tune in on Wednesdays. hi everybody i'm nikolaj tangen the ceo of the norwegian someone wealth fund and today i'm really happy because i'm here with mala gaon car who i've known for a long time actually mala founded surgo cap with 1.8 billion dollars and now it's at 6 billion dollars and before that she spent 23 years as a founding partner of lone pine capital one of the most successful hedge funds of all times. Great to have you here. Great to be here, Nikolai. Thank you. Tell me about Sergio Cap Partners, you know, your company.

0:40Yeah. Sergio Cap tries to do what many investment firms try to do. It tries to beat the market over a three to five year cycle with less risk than the market, a risk defined as loss of capital, not volatility. And the way we try to achieve that is by identifying this very small handful of truly great businesses that exist in the world. And we do that through a, our product is really our process, a very transparent process of looking for very specific factors that really are distillation, as you pointed out earlier, of my lessons I've learned, the many mistakes and lessons I've learned from investing over 23 years with some of the best people in the business, my former colleagues at Lone Pine.

1:25And so that distillation has led to Sergo. There are many different factors that lead to identification of a truly brilliant business. But the way I define a great business is a business with very long duration moats. And duration really is our true differentiation. So moat being that it's difficult to compete with them, it's difficult to compete them out. How many great companies are there in the world? As I said, a small handful. I don't think there are that many. We focus on really four verticals where I think there is a bit of an edge from one very specific factor. Every business is a technology business, right?

1:59So if you're an aerospace company or a med tech business or a financial data business, you are a technology company in your backbone. If you want to deliver at scale and with quality, you have to be a tech business. And I think understanding the tech stack map of businesses is something we spend a lot of time on, especially in non-tech businesses. I think that's one. The second is how old technologies can disrupt in very new ways. So if you think about something like, we've talked about this, but the auto industry, which employs far more people in the tech industry, but it's being disrupted right now by, you know, technology that was invented in 1976, you know, the lithium ion batteries.

2:32So I think that is, that's always interesting to me. Or, you know, in when, you know, we started investing career, we were buying GPUs to, you know, make our video games look a little more fun. And then fast forward to now, they're actually driving what's probably one of the more tectonic plate shifts in terms of social and demographic and technology shifts of our time, which is AI. So I think how old technologies disrupt in new ways and looking for that in non-tech businesses is something we spend a lot of time on as well. What are some of the most counterintuitive benefits of AI that you are seeing in your companies?

3:05I think what is happening within medical technologies is not perhaps as well or broadly understood as it should. So to give you a very specific instance, if you look at the imaging space, so MRIs, CT scans, and so on, the accuracy and the speed at which these images can be conducted are now improving at a pace of almost 70 % versus what we would have even a few years ago. That in an aging demographic globally has been incredibly helpful for not just therapeutic care, but preventive care. And in a way that makes obviously overall care much more cost effective. So I think that is one big area around imaging and really understanding earlier how some of these chronic diseases are evolving.

3:50And I think obviously nipping these in the bud earlier has been one big one. The other big area has been around how surgery is conducted. So I think the intersection, people talk about AI and robotics in the manufacturing space. What I think people don't realize sometimes is there are about 300 million surgeries conducted globally, and they're just beginning to be penetrated by what's happening with robotic surgery, specifically companies like Intuitive Surgical. So I think that is another big category where you're beginning to see real innovation happening, where the combination of haptic feedback, mapping software, better technologies around surgical conduct itself are really leading to a lower error, easier training for medical students, and a overall better context for how these therapeutic cares can be conducted.

4:42And as you know, there's a big discussion, obviously, around how healthcare costs can be contained. And I have some hopes that AI applied intelligently can help with this. So, yeah, I think broadly this idea of how technology is intersecting with non-technology businesses and how you can use data to analyze that and de-bias the very human decision-making process, something we spend a lot of time on. Now, you believe in concentration. You have quite big. When you go for something, you go pretty big, right? Correct. Tell me how you think about concentration. I very intentionally sat on these four verticals.

5:18It happened to be enterprise data, tech broadly, financial services and healthcare services, as well as industrial technologies, because I felt those were the areas where these themes of emerging technology disruption were most relevant and where you could see market leaders with very durable moats where incremental returns and the capital you can put to work at those incremental returns had a clearer path given all the technology trends we're seeing today. So we purely just focus on those four areas. We also think about thematic exposure as well. And the reason for that, I think, is very simple.

5:54One, I think that allows you to play offense when at some point or the other, due to the passive nature of the market structure now increasingly, the odd factor rotation here or there could disrupt a portfolio. That allows us to play offense during those periods. And we believe there is actually a sufficiently interesting set of investment ideas across each of these four sectors where we're not compromising. And we have very different drivers of the long theses of each of these names. You can also invest in private companies. Yes. Why did you choose to be able to do that? I think some of the...

6:29We obviously know about the very large market caps that exist, the very large businesses that exist in the private realm. And we know about the fact that there are fewer businesses that are out there in the public markets than have been for a while. So those trends aside, I think another reason to look at the private markets is because they're often the most disruptive. Change always happens at the edges, not at the core, right? And that's my fundamental view. And the edges is really the small company, the private company, the unsung founder who's just emerging. That's really where change at the margin will happen.

7:01So making sure that we have our networks and thought processes out there, not just in the U.S., but globally, within these four areas that we focus on, these four big industry categories we focus on, is something that I think is incumbent upon us in talking to private companies as part of that process. It's as simple as that. How does shorting compare with long investing? Can the same person do both? It's a great question because it's really the opposite muscle of the long side, as you know. It's really thinking about, so sometimes you will see clear the shorts that are the broken mirror images of the longs.

7:35X is winning, Y is losing. I find those are very rare and few and far between, and that's not enough usually. I think in addition to that, you have to have the timing correct as to when exactly those winner-loser dynamics will play out. Usually, if it plays out through some combination of clear price competitive pressures, clear share competitive pressures leading to those pricing pressures, and then that combined with other factors such as just misexecution by management, you have a pretty good short. The problem, though, is that combination of factors occurring within the time frame you need is a tricky one.

8:16And then add to that all of the sort of factor rotations and the passive nature of the markets today, often driven by quant and ETF and other funds. You have other dynamics that are driving trading you need to think about. Do you short? We do short. It's just so, so stressful. To be fair, I enjoy it. Because you are wrong for such a long period of time. And when you're right, it's just like in these bursts, you know, and they don't last that long. You may be like super right for one week and then you're kind of wrong again for two years. You are a role model for many women. And I think when you launched your fund, it was the biggest launch, biggest hedge fund launch of any woman ever, right?

8:59That's pretty amazing. Any reflections around being a woman in the investment world? I would say, look, first of all, I hope that's a record that's broken very quickly, and I'm sure it will be. There's some really amazing, talented women out there. Look, I hope I'm not just a role model for women, but, you know, the broader investment community and hopefully over time, the philanthropic community as well. That's a very important part of my work and my ethos and my identity. I would say I'm a little, I really think the investment business broadly, whether you're an outsider in any way, shape or form, is a great one.

9:36It's about as meritocratic a business as I can think of. I mean, I could be a green Martian with two horns in my head, but if I produce investment returns, there'll be a line out the door, you know, wanting to get my product, right? So I think it's a very meritocratic industry, and I just hope that places like Sergo, places like the platform you're running here are just ways for more people to add value in this industry. Because I really think it's a terrific one for people who are intellectually curious of all stripes and shapes and sizes to come in and be of use to the world at large.