Opportunities for Digital Transformation Capital with David Roux

32:18So long before Zoom, 20, 30 million people on at the same time, which was an amazing technical feat. Wasn't exactly clear what it had to do with auctions, even less clear what it had to do with PayPal, but eBay bought Skype. And it kind of noodled along in the Skype portfolio in the early 2000s for a year, two years. No one paid any attention to it at all. We said, my gosh, look, they've had three CEOs in two years. They're spread out all over the place. They haven't upgraded the product in two years. Maybe they'd be willing to sell it. Contact them once, contact them twice. Eventually, they said, yeah, we'd be willing to talk to you about that because we had a point of view about this is a really exciting market, but no one's paying any attention.

33:08So if we could carve that out, we went to eBay and said, keep as much of this as you want. We'll buy the rest of it at a full valuation, which we did. And it was a business that had nice growth despite really being a feral child, right? And we said, look, get paid twice. We'll pay you once what it's worth, and we're going to make this way more valuable than you possibly could because we can focus on it and make a bunch of changes. And it was sort of a troubled, was a complicated asset where there was so much staying in the litigation. They hadn't upgraded it for a long time. Apple had just announced that they were going to be offering a video service.

33:51It became FaceTime. So there was, you know, Microsoft said they wanted to be in the business. So there was a lot of competition. There was competition from very credible, large players. And if I recall correctly, around that time, all of the fat pipes and broad bandwidth that had come public in the late 90s, early 2000s were coming back up around pennies on the dollar. I recall Global Crossing and Metromedia Fiber and all these companies. So the bandwidth was coming aligned at a cheap price that didn't exist that way in the 90s, which is very much right into the sweet spot of Skype. Yeah, and by the way, not so dissimilar from the AI processing crunch that we have today where people are pouring a huge amount of super expensive stuff, which you do need, but which will be available three years and five years and 10 years from now.

34:45Much cheaper. Really, really different pricing. You end up buying them, if I recall correctly, not much long after that, didn't Microsoft come along and scoop them up from you? Well, what happened is that we bought it, completely upgraded the software, changed out the entire management team, developed a series of partnerships, built a business side of it because it had been very much a kind of B2C phenomenon. Kind of really opened up a product line around B2B. And it ended up being very attractive for Microsoft, sold it to them. one of the foundation elements in what is Teams today and really helped them.

35:25I think it turned out to be a good deal for Silver Lake, but it also, I think, as all deals should be, a very good deal for the acquirers. Any other memorable Silver Lake deals? We're oftentimes, I think maybe two others that we are well known for, we were the largest investor in Alibaba before it went public. And that was a - explosive that was explosive but it was a scary investment it was a minority investment in a chinese e-commerce company you know located on the other side of the world who's also your co your co-investor is the people's republic of china right they own a ultimate regulator right for sure um owner slash regulator and you know masa son and soft bank are already large investors.

36:18But we liked the management team. We loved the story. And that turned out to be a very good, that was a very, very good investment. And then the last one, and really still very much in the news, was Dell. Big, well-known public company, eponymously named for its CEO who'd left, kind of like Charles Schultz, left, came back. first went private where Michael rolled essentially all of his ownership into it, made a very large personal bet. So it was a gutsy bet because it was at a time, again, this is a place where the conventional wisdom was the PC was going away. We were going to use our phones.

37:04We were going to use iPads. Somehow it was going to go away. We didn't think it was going to go away. And we thought that the market hadn't really appreciated how much work Michael had done building up a store of intellectual property around next generation computing, whether it's cyber, cloud computing. And, you know, maybe it's like maybe a basketball franchise that has a bunch of draft picks. You know what I'm saying? or kind of young talent, which we thought was going to be very valuable because we had a point of view about the importance of cloud. We had a point of view about the importance of cyber, and we thought that those assets were undervalued because the whole of the company was getting valued like it was a commodity PC vendor.

37:58So let's talk about what did you do post Silver Lake in the 2010s? I'm a starter and a builder. I like backing social entrepreneurs and feel particularly passionate about conservation, biomedical research, and education. We took our foundation resources and focused it first on a thing out in Seattle called the Institute for Health Metrics and Evaluation. Stood that up. Bill Gates, blessedly, is doing most of the support now. But that's now 500 researchers, and they focus on understanding in detail the global burden of disease so that we know how healthy or sick every country is and where to allocate our health care dollars.

38:48On the biomedical research side, became very active as the chairman of Jackson Laboratories, one of the largest independent institutes in the country, focused on kind of the genetic causes of rare diseases. We were able to double the size of that, quadruple that endowment. And then more recently in the education space, I had this view that we were not appreciating how big artificial intelligence was going to be. And that as a consequence, as a nation, we are under-invested in advanced computer science. In other words, we've got programs at all the best universities, but they're graduating hundreds of people, tens of thousands, or maybe even hundreds of thousands that we need.

39:36Yeah, because what's happened is that the academics are focused on building the new platform, the so-called large language models. Right. When, think about that like it's a nuclear power plant, complicated, high science. But it now works, and it'll work a little better, and they'll keep refining it and so forth, but it works. And that what we need next are application engineers. We need electricians. We need people to design appliances. We need to run wires. We need to change from steam to electricity. And we don't have those people. And so we already know what we need. By the way, it'll be 20 or 30 years of implementation ahead of us.

40:20So these will be great jobs for a lot of people. So we've built the first school. We spent a few years getting that organized, opened it in 20. We're now, I guess, four years in. We've got 1 ,000 students, 200 corporate partners, and started or accelerated 94 companies, 400 jobs. You know, really exciting. You're doing this for a couple of years. You're standing up. I'm happy as a clam. Right. I'm making things. I'm helping people. Right. You're running the Rue Family Foundation, the Rue Institute. You're basically... I was not looking to start a new business, much less an investment firm. Right.

41:06What happened is that my very good friend, Anjan Mukherjee, we were talking about the future of private equity. During that conversation, we were saying, you know, this next generation of private equity needs to do something different if we want to continue producing the supranormal levels of profit that we've seen from the asset class. Because there's more competition, prices are higher, credit's more difficult, you can't count on multiple expansion. So you're going to have to make the business you buy better during the pendency of your ownership. There's only so much procurement improvements available.

41:45You can only upgrade management so far. My observation was this, which is that I said, you know, this tech thing, it's only 10 % of the economy. When you take all of GDP, when you take all of semis, all of computing, all of networking, all of software, all of social media, it's 10 % of GDP. I said, what's going on right now is the other 90 % of the economy is being digitized. Huge opportunity. Now, big difference is that now the nature of technology is that it's the only capital good that really kind of decreases in price and makes itself smaller, right? So you think about what's the difference between now and 20 years ago?

42:27Now, the technology is much smaller. It's much more ubiquitous. It's much less expensive. And it's much easier to use. All of those things mean it's going to go everywhere. So we're talking about this and we're getting ourselves lathered up about the fact that all of these analog companies, industrial firms, consumer firms, healthcare firms, services companies, they all need to adopt more technology, but none of them know how. Opportunity in plain sight. It's dead obvious that they're going to do this, right? You think about the companies that you know in those kind of sectors that are doing well are almost always those that have adopted the technology earlier.

43:12You know, J.P. Morgan and Finance or Walmart and Retail. You know, those companies that get there early get a big leg up on their analog competitors. We said we could do, we could build an investment firm that not only could write a check, but could be your technology partner in helping you architect a business model future that would allow you to grow your company faster, perform better, you know, produce more profits, you know, and drive value. So let me push back against one thing you said just a little bit. Please. This opportunity in plain sight, if it was really in such plain sight, everybody would be doing it.

43:58But instead, it takes a couple of guys with a lot of technology experience, a lot of operational experience, and financial experience to make this real. I partially agree. Okay. All right. And here's the partial part. The partial part is that I think the opportunity is easy to see. Ah, the execution. I think the execution is hard. Is the challenge. So the way I oftentimes say it is that it's easy to describe. It's just really hard to do. And it's hard to do because you need to understand the technology itself. You need to know the vendors. You need to be able to set priorities. You need to have a realistic sense of time.

44:42And you need to know how to weave this new technology into the processes that already exist. It's not like these companies have no tech. Every one, any company of any scale has an ERP system. They have a bunch of databases. There's compliance issues. There's, you know, cyber. There's all kinds of things so that you have to integrate into what's already there. So when I think of private equity, at least from the 90s, 2000s, even the 2010s, I think of them as a form of financial engineering to unlock value. What you're really describing is digital transformative capital, to steal a phrase from your website.

45:28So this insight is, hey, we don't need to just do financial engineering. if we could get these companies to adapt the latest, greatest tech in a way that's useful and productive, we can really unlock a lot of value. Is that what led to Bay Pine getting launched and you kind of coming out of retirement to try it again? Yes. I mean, that was sort of Anjan calling for the lefty from the bullpen. Right. Right. Let's get the lefty. Yeah. So it started innocently enough where it was really a conversation between two friends with a lot of mutual respect, you know, respect, where we had a similar, you know, 15, 20 year runs in private equity.

46:14So we were very current, highly topical understanding of what was going on, and we realized that we could take and put in one place, really, it's like a binary weapon, right? Where a Mukherjee quality, world-class private equity firm with fabulous diligence, great structuring, really thoughtful modeling, great financial engineering. We don't want to throw that away. Right. Those are all valuable lessons. but combine it with the operating prowess, tech insight, and extended personal network of relationships that would allow us to do things for and on behalf of our portfolio companies that simply wouldn't be possible, practical, or maybe even imagined by our competitors.

47:16It sounds like your competitors are the consulting firms who come in and kind of seagull an event. They come in, they eat everything, they grapple everything, they fly away, as opposed to you guys not only coming in with technology expertise, operational expertise, but capital, writing a check. That's a very different relationship than paying a consultant. Yeah. You know, it's interesting. The consultants actually play a very important role, and I wouldn't want to diminish it, around awareness building. And when we go in to talk to a management team, they almost always have had a consulting encounter.

48:07Right. Right? And they'll have a stack of PowerPoint slides, which they'll kind of run to their office to show us, that says, the consultant told me there are 16 things that I can do with technology. But I don't know which one I should do. Right. I don't know what I should do first. I don't know who should do it for me. I don't know how much it should cost. They're not going to implement it. I don't know how long it will take. I don't know how it integrates with what I've already got. And I particularly don't know what to do if anything goes wrong. And so it goes back to the implementation part.

48:43And so what we like to see is a management team that has self-awareness and enthusiasm but are not themselves technically fluent. where we can bring that to the party in a way that can be catalytic for the management team to give them confidence because they have a willingness to act. They're just not sure what to do, and they don't want to do something harmful. And so having somebody who's done it before, been there, is super useful. So let's talk about some of your portfolio companies and how they're engaging in digital transformation. We were talking about AI earlier. How are you guys looking at AI to facilitate taking some existing companies and making them more productive?

49:45Yeah. Well, first thing, we could spend a whole session on AI. But here's what I would say first. We believe it is actually, despite all the hype, and notwithstanding all the attention it's already received, bigger than most people think. Yeah, I'm with you on that. But - I'll give you a funny example. Please. So I'm in the midst of putting together a manuscript, and the publisher, they're not keen on doing an index. It takes a couple of months. You're paying a person all this time to look up every name, everything, every that. for a couple hundred bucks, there's an AI PDF indexer that will identify every proper name in 400 pages and create an index relative to...

50:35And I'm just imagining reproducing that sort of dumb mechanical work over and over and over again. And I know I'm just scratching the surface here. Very well. It's a great example. I think that right now, most people's experience of AI maybe is a chat bot, right? You know, chat GPT or, you know. Or go to any car company, you get that pop-up, and you know that's not a live person at two in the morning. What I always say is just imagine all the best AI, current ones today. And by the way, the ones that you're seeing today are the worst that you will ever see. Right, right. A little better every day.

51:21Worst you will ever see. They read, they write, they hear, they see. They can compose poetry, music in any genre, photorealistic images. they can create video all of this today right right this is all available uh today they also write computer code as well or better than most uh programmers they can do complex mathematics they can solve puzzles they can play games they can run factories they can drive cars It is really hard to overestimate what's possible. And we are standing really for the first time after decades of discussion about it on the brink of real white-collar dramatic, white-collar productivity gains, really dramatic.

52:27Best example that I would use for you to kind of give you a framework for it is that you're going to see a lot of AI show up as features in products that you already use. Like, you know, all your Apple products. Right. We'll have it soon. The first thing you get that's probably a product will be agents. You know, something that works with you like a partner, right? Like a writing partner that you would use, right? Sort of a, you know, think about it as a more advanced version of what you were just describing. Right. The best thing out there right now to illustrate that is a product called Copilot from Microsoft, which works with a software engineer.

53:07You have it running on your machine, and it's basically a programming buddy that will help you write code, suggest different options, help you debug, track, blah, blah, blah. And it typically improves productivity 25 % to 50 % out of the box. Amazing. And can be up to 100%. Right. Right? It all by itself has dampened the demand for computer programmers. Really? Because it's made the ones that we have so much better. You've doubled the effective productivity. Up to. But think about it as very dramatic, right? You know, if you had five, maybe you need four. If you, you know, it's just a really significant improvement, which makes it practical to imagine that you're going to be able to do this in law firms and accounting firms and consulting firms, where you take your average employee and make them as good as your best.

54:14So let's take an old economy company that's not traditionally tech-oriented. You guys own Mavis Tire Express Services. Yes. How does a consumer service business like that get digitally transformed? How do you monitor that? The CEO walks into our office and said, I know everything in the world about tires. I know where to buy them, how to store them, how to put them on, how to rotate them. I know how to balance them. I know how to align them. Nothing. I know everything about tires. I know anything about technology. But I have a very strong opinion that technology could help my business, and I just don't know where to start.

54:55I've got – he had talked to a bunch of consultants. He had lots and lots of ideas. And there are hundreds of these Mavis stores, right? Thousands. Thousands. There were a thousand Mavis stores when we first started chatting three years ago. So it's a good-sized business, very well-run, nice growth, profitable. Not a business that's broken, but a business where the management team had a felt need around the opportunity to make it better and really steal a march on their competitors. And so what we did is sit down with them and say, look, here are six different use cases that you might want to think about.

55:41Here's a way around digital marketing. Here's a better customer experience. Here's what you can do around inventory management. Here's labor productivity and capacity utilization planning. Here's dynamic pricing. And we went through an entire kind of brainstorming session around that, produced a whole plan. So usually when you do a new investment, you'll do an underwriting. And we do a normal financial underwriting like everyone else. What's different is we also do, in addition, a separate digital underwriting where we talk with the management team to create a technology roadmap for the enterprise that integrates with their business model.

56:30and extends it to create performance improvements. And what we did with them, sat down, we got better digital marketing so that the search engine's optimized for, if you're calling and writing in, I've got a flat tire and I'm in Poughkeepsie, then here's where you go. Improve the customer experience so you know when to bring your car in, limit wait times, accurate estimates of how long it is going to take, what it's going to cost, what your options are, dramatically improved kind of labor utilization in the shops, capacity utilization, got the pricing right so that we manage margins and customer expectations appropriately.

57:21All of that, we could get done in two days or two weeks, but some of those things has taken us two years to put up. The end result, though, is that the business is now more than twice as big, roughly twice as profitable. And that's not all due to the digital, but the digital is very fundamentally enabling of that growth. As you might imagine, if you're opening new stores, it's a lot easier to do if you do the same thing in every single store. Right. So let's talk about another portfolio company, Pollywood. Yeah. High-density polythene outdoor furniture. How can technology improve that? You know, it's an interesting business.

58:06It's a specialty manufacturing company that builds kind of very high quality. It feels like wood. Outdoor furniture. Very durable, colorful, but doesn't chip, doesn't fade. Doesn't need to be painted. Doesn't need to be painted. You don't have to take it in during the winter, any of those things. So that's sort of the fundamental value proposition of the thing. But here's the difference, which is that we said, look, you guys are manufacturing guys. People have built it, and they're really good because they use recycled plastic, So it's incredibly sustainable. You know, they drill the holes. They do the trimming.

58:48They just take the plastic waste, put it back in the top. So it's a zero waste, highly sustainable. Fantastic story. During COVID, they grew their online business a lot. They're not marketing people, right? So we're able to show them how to significantly improve yield on their online, the e-commerce side of the business. and we're able to do that, by the way, very quickly, almost instantly around that, able to see how to get to new adjacent market areas based on finding more people like the ones who are already buying. Once you identify a customer, you want to be able to identify more. Once you identify them electronically, then it's a lot easier to find that electronic signature and go look for it online rather than waiting for people to find, you.

59:42The other thing that we're doing there is that we have highly automated manufacturing. And so that we can take the manufacturing and instead of manufacturing 20 or 200 chairs, putting them in a warehouse, sending them to a distribution center or a store and hoping somebody buys them, we can instead take an order, build the chair, send it to them. So it's not just just in time, but it's real time that creates pull. So that dramatic improvements in efficiency, but it also makes it easier to do custom things, improves turnaround time. You get your furniture much faster. Those would be good examples.

1:00:25Really, really interesting. I only have you for a few more minutes. So before I get to my favorite questions, let me just ask you one last question. We talked about the Rue Family Foundation and Institute briefly. Tell us a little bit about what you focus on with the Rue Family Foundation. What we like to do is find social entrepreneurs, folks who are looking to make scale impact in education, particularly educational access, conservation, you know, kind of environmental things, biomedical research, and then a particular focus of mine is around helping support veterans and their families. Really, really good stuff.

1:01:14All right, so this will be our speed round. I have about four minutes, five minutes to get through five questions. Let's just do this quickly. what's keeping you entertained these days? What are you watching or listening to? Right now, my wife and I are watching The Lioness and The Diplomat. We're about halfway through The Diplomat, so no spoilers. Season two. Good. We loved The Crown, and I am waiting anxiously for season two of Wolf Hall, the Henry VIII and Thomas Cromwell story. In podcast land, my current favorite is Fall of Civilizations by Paul Cooper. Huh, interesting. Tell us about your mentors who helped to shape your career.

1:02:05You know, I've had a couple. I've been very fortunate. Early guy was a guy named Chuck Glover, a newspaper guy who ended up running Cox Enterprises, the media company. he funded my uh cox funded my first company he was a newspaper guy and the key lesson from him was look i had to put out a product every day and so just getting in the habit of putting one foot in front of the other making a little bit of progress every day and just keep going uh was really valuable. The other guy who was great for me was Dr. Frank King. And what I learned from Frank, he was the head of engineering at Lotus and had a similar job at IBM before that.

1:02:53What I learned from him was that the people were more important than the products. And that building your organization, primacy of people, and particularly always being, you know, always recruiting being kind of on the prowl all the time uh was super valuable let's talk about books what are some of your favorites and what are you reading currently i uh i'm a mark halpern fan i love paris in the present tense um i like don winslow city on fire is one of my favorite books It's first in a trilogy with City of Desire and City in Ruins. I like anything by Dennis Lehane, anything by Elizabeth Strout.

1:03:43And I'm currently just finished The Magician by Edmund Duvall, just reading The Hair with Amber Eyes, also by Edmund Duvall. Huh, interesting. Our final two questions. What sort of advice would you give a recent college grad interested in a career in either private equity or technology? You know, I always tell them the same thing. I always tell them to do something else first. And I say that because I'm a great believer in domain expertise. And so I usually counsel younger folks coming out of school to go learn an industry and or learn a craft, learn a skill. Be good at marketing, be good at sales.

1:04:30You know, be good at finance. Pick something where you're really good at it because it gives you a cachet and a standing that you don't otherwise have. And our final question, what do you know about the world of private equity investing today that might have been helpful back in 1999 when you were first standing up Silver Lake? I wish I knew how important it was to be first. Really? How interesting. I think as an operating person, I probably intuited it and understood it because I kind of saw it around me, the advantages that accrue to a category leader. You just don't need to be as good. Think about Elon Musk.

1:05:24His first electric car was a bundle of borrowed parts and components. it barely worked it was hugely expensive um literally a lotus salon with laptop batteries with laptop batteries in it wired together with you know with soldering wire cost of fortune incredibly uncomfortable to drive totally unreliable um gotta start somewhere but he was able to do that for years and years and years and learn and learn and develop you know an expertise and some skills. Same thing's true for, if you think about it, Jeff Bezos, right? Selling books that no one wanted. Right. Losing money hand over fist for a decade.

1:06:08But building infrastructure, building experience, learning lessons, you know, creating a team that became the basis for, you know, both of those things didn't work until they did. And boy, when they worked, they really worked great. They really worked. Thank you, David, for being so generous with your time. We have been speaking with David Rue. He is the executive chairman of Baypine, a private equity firm focused on digital transformation. If you enjoy this conversation, well, check out any of the 500 plus discussions we've had over the past 10 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts.

1:06:50And check out my new podcast, At The Money, short discussions with experts on specific topics involving your money, earning it, spending it, and most importantly, investing in it at The Money, wherever you find your favorite podcasts and in the Masters in Business feed. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts here at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.