Episode 22: Why US AI Companies Scale Faster Than the UK

0:01Chris Maguire:Welcome to the Dealmaker Uncut podcast where we speak to some of the UK's most exciting entrepreneurs and hear their investment journeys. We'll discuss the challenges, successes and lessons they've learned along the way with expert deals commentary from Jonathan Boyers, head of Alvarez & Marcel Corporate Finance and me, Chris Maguire, executive editor at Business Cloud. Welcome everyone to the latest episode of the Dealmaker Uncut podcast powered by Albers and Marcel. My name is Chris McGuire and I'm the executive editor of Business Cloud. As always, I'm joined by the multiple award-winning dealmaker himself, Jonathan Boyers.

0:36Chris Maguire:Jonathan's been involved in deals totaling billions of pounds during his long and illustrious career and he's managing director and head of Albers and Marcel's corporate finance practice in the UK. Welcome Jonathan. Hi Chris. and this is the podcast that gets you inside the deal in the first part of the deal today we're going to be interviewing our special guest and after that we're going to have a little break and in part two jonathan will be leaning on his 35 plus years of experience of working in corporate finance to answer your dear questions so jonathan who are we speaking to today thanks chris well today we are honored to be speaking to steve rigby who is the ceo of rigby group so steve is an entrepreneur, founder, philanthropist, businessman, very active in the media as well.

1:23So delighted to have you joining us. Rigby Group is one of the world's largest and most successful family-owned businesses. So I'm looking forward to hearing a lot more about that business and how you run it. Great. Nice to be here. Thank you.

1:39Chris Maguire:And it's also worth saying, under your leadership, the Rigby Group's grown its turnover from 1.5 billion to 4 billion as well so steve i'm going to take you back a little bit actually to the inception of the business you're the second generation of the rigby family to run the group which was founded 51 years ago in 1975 by your father sir peter rigby with a 2 000 pound loan for the benefit of our listeners and our viewers can you describe rigby group and some of the businesses that sit within it sure so the main business chris is a it services business called SEC. That's about 45 years old. As with many groups, the group has morphed over the years, but that's been a very consistent part.

2:16It makes up about 85 % of our revenue, quite a substantial amount of our long-term profitability, and is a business that we intend to hold through the generations. So as you say, we're second generation. In fact, the third generation are already in the business. And we hope SEC is a business that can survive despite being a technology business and being very old for a technology business we hope that business will go through the generation so it operates in the UK, France, Spain, Romania and Vietnam and supplies, maintains and supports infrastructure on behalf of large governments and large corporates.

2:52Chris Maguire:And before Jonathan dives in I'm always interested in the human interest of it or all and I'm just curious to know what it was like for you and your brother James growing up when your father's Sir Peter Rigby and he's in all the headlines and he's making deals and stuff like that what's it like for you growing up and was that was there a pressure attached to that you know I think the essence of a family business I often have this debate people think it's a long term you know multi-generational business if you're sat talking with your children about business around the dinner table as you are if you're a business owner in my view that's a family business so you know despite it being first generation with Peter you know I grew up in a household that was entrepreneurial and we were constantly talking about business whether I knew that or not at the time I now reflect back and look at the way I've I've brought up my children and in reality you know my my middle son could tell you what Ebert Dar was when he was 12 as an example so you know you end up talking in a language that your children get to understand so I was very lucky to be brought up in that household and in an environment where going into business felt a very natural thing to do.

3:56Chris Maguire:I reckon Jonathan's kids could say what Ebert Dyer was at 12 as well because Jonathan talks about it but yeah over to you Jonathan. Yeah no I'm interested in how you because the business that has grown quite a lot under your stewardship hasn't it and I'm just interested in the growth story and how you've achieved that. Yes in fact we've a non-exec director just retiring and we had a board meeting last week and we were talking about that journey he'd been involved for 15 years and the business has transitioned dramatically and actually as we look at this period ahead we're stepping into this potential recession that the country is facing right now in incredible health and it's the first time we've ever been in that position so we're 50 years old but it's the first time the group's been in a position where it's really sat on a lot of cash resources so that that journey has been a journey of not just trading companies but also going through buy and build what you and I would call a roll-up and we've had a number of successful rollups during that period of time so over the last in fact 13 years we've we've disposed of about 750 million pounds of businesses so despite keeping our main trading company so that journey of sort of wealth creation has now put us in a position where you know the family is in a strong position it's got a a great main trading company uh coupled with a very strong family office and an ability to uh create businesses through experience know-how expertise in a particular sector and that's quite a powerful environment that also has led us into venture capital as well as running you know public market investments so it's quite a powerful position to be in and that that journey has occurred through the creation of wealth and importantly the retention of that wealth in a company that allows that wealth to compound and compounding is one of the best inventions in the financial world you know money has this habit of growing if you look after it and nurture it well the businesses that you sold i see that you had that you had an airport group that you've sold recently what can you just talk about that deal again we've often followed interest so my father was a keen aviator we bought coventry airport which in fact we still own but from that we went into post-global financial crisis the unwinding of debt in airports took a little bit of time to happen before it reached maturity often the deals were done in 07 08 on five and six year terms so we entered that market in about 2013 acquired a business from Belfer BT, then went and acquired a business from Penta Capital, and then finally one from Manchester Airports Group, all in an environment where they were semi-distressed, in some situations fully distressed, in other situations they were perhaps less loved like in Manchester Airport.

6:31So we bought a series of assets that were deemed to be subscale, put them together, gained the synergies, effectively financed them, nurtured and loved them for a period of time, about 100 board meetings in my case uh we got slowed down by covid our exit uh was intended to be a little earlier but covid covid unfortunately for the industry slowed everyone down by about three years and then successfully sold that business to icg who are a footsie 100 fund that was important for us we wanted to keep it as a uk asset uh but you know a good journey and um you know two times 2.7 times money so for us you know a good journey along the way And I suppose it focuses the group because you've also been building an investment business that looks like it's quite focused on technology investment.

7:16So would you be able to talk a bit about how that's evolving? Yes, I think as often happens in family businesses, in fact, you end up when you diversify, you diversify too far, too wide. And that was the case with us. So in the last few years, we've been really paring that back down. And we're principally a technology or real estate based business. so we remain with some assets in commercial real estate specifically centered around a large development at coventry airport with residential a business we have called elect and with our hotels business so you're in mallory court don't you which is what a hotel i stayed at regularly okay very good thank you midlands um yeah so so outside of real estate we are a technology business and you'll see us more and more in that field so today you're a prolific investor in ai uh both here in the UK but most importantly in the US we run our own private equity portfolio with our own capital and you know as I get older I don't know my energy is quite the same as it used to be to go on the six seven year journeys that are required but we've still got five plays all technology businesses in that in that area and obviously then the main trade company so you will see us more and more morphed back to being a really a technology only group in time.

8:25Could you talk a little bit about the developments in the software sector so we've been we were talking earlier about the software sell-off that's happened over the last few months and how AI is starting to to affect that that market I'd be really interested in your perspective on on on how that's evolving so I don't think any business model is safe at this moment and the world is focusing on SaaS software businesses specifically what what people have coined the SaaS apocalypse and that's seen very material changes in market valuations, both private and public market valuations in the course of the last six weeks.

9:03But I think it's symptomatic of the change that's coming in all industry and that's the same for your business as well as it is for mine. At the moment what I think we're generally seeing across the board in enterprises is slow adoption and that's driven through customers being slow in their transition and most importantly being employees being slow there is a growing almost resentment in ai in in in consumers that's coming through in a lot of data that at the us at the moment and people are worried about the impact it's going to have on their lives the reality is it's coming the train has left the station and we as business leaders have to change our companies so that the real shame really for for employees is they've got to really get on this journey with us because it is it is definitely coming and it's going to come to software companies very strongly because ultimately historically you have fixed code and we as users interacted with that fixed code in the world of tomorrow you're going to have agent to agent interaction and in fact our role will change quite dramatically so that's playing through in people's thought processes on SaaS businesses which have had very high multiples at the very top end you know we're talking of multiples of 25 and 27 times EBITDA, seven times revenue type multiples.

10:17In a world where that's no longer safer, where you can't predict that safe, you know, if you're ServiceNow or your SAP or your Oracle, you've likely got a very strong moat because they're very expensive, very complicated systems to take out. But if you're a point solution, solving a particular problem in HR or legal, your moat is really quite weak. So I think we're going to see this ongoing revaluation, perhaps normalization of SaaS-based businesses. At the moment, unfortunately, the markets are closed for new debt. And that's not helpful in the world of M &A, and it's not helpful for me as an investor.

10:51And that's predominantly why as an investor, we're focused on the infrastructure layer right now. We're avoiding applications broadly, with the exception of productivity. And we're focused much more on that infrastructure layer and where, if you like what has been called the picks and shovels of AI, that's where our focus is. But certainly in the SaaS world, which is an important world, it's a choppy time at the moment. I suspect that will continue throughout the year.

11:16Chris Maguire:What do you see? Yeah, they're very similar. We've got a number of clients in the software sector. Some of them have native software in their businesses and they're expecting to be winners. Some of them are not, and they're going to have to take a more defensive position. It's just an interesting time, but I think there's quite a lot of recalibration going on in terms of value aspirations and strategies. But I mean, I am interested in your thought, what you say about AI, and particularly we're now implementing AI in our business and I look across the sectors. and like you say i think almost driving the change into the business is a change management process that i think a lot of leaders are not really used to managing change so effectively i'm interested in how you're doing it in your in your core business too slowly uh is the honest answer because as you say this is actually business transformation it's not an ai issue so you're reinventing a process and you know for you that process you know if it was in orders as an example that's really rethinking the whole stack of order and how you go about that process how much human interaction versus machine is required do you change your business model on charge out and fees i doubt it but uh you know that so that every business model is having to be rethought so we are we're making progress but i think like most businesses we're behind where we would like to be the challenge we face collectively is that is that whilst this train is moving slowly today it's going to gather momentum and if you don't keep up with that pace of change then you're going to be in difficulty and as I say the key aspect there is both vision and leadership for us as leaders and businesses but importantly employee adoption and I do sense a substantial amount of employee resistance and that's almost becoming a little bit entrenched.

13:09I agree we've seen we've seen the same and it's sort of explaining to people the benefits to them and the benefits to the business and then but but driving it in driving the change you can't just tell people to start using it you've got to show them how to do it yeah um it's a it's a fascinating time this is a this is a government issue a nationwide issue so you know the government's made a decision to train 10 million people in ai but if you dive beneath the surface it's really quite like training and in reality that the delivery of training has to fall in the private sector the question is do we have to be incentivized in the tax system to do that but you know learning and development for us as employers large employers is going to become more and more important we yeah one of the things that struck me we were talking to a client the other day who's got some tech dd um under underway and the tech dd provider was asking for a five year roadmap of how the tech should evolve and they were saying we we probably couldn't give be a six-month roadmap because they're they are because they are they've got their ai native in part they're every two weeks they're upgrading their software stack um so well we can't even tell you what it'll what we'll be doing in three in three months never mind five years so i think everybody's time frames need to need to change yep it's a fascinating time i'm going to continue

14:36Chris Maguire:the link talking about ai just change it from an investment point of view so i was looking at your investments i think you've invested in around 30 businesses 13 of which are in the uk 17 are in the us you mentioned earlier that the us is very different to the uk just explain how they are so different and in terms of the companies you're investing in as well so i mean i mean the most standout one because the math is in my head i wrote it down a few days ago is anthropic so we're lucky to be a an investor in anthropic two years ago but bear in mind it's a four-year-old company So early enough, so end of 2023,$100 million, end of 2024,$1 billion, end of 2025,$16 billion, and end of February 26,$19 billion.

15:17So you have these companies growing at extraordinary paces. And, you know, Anthropic happens to be probably one of the most extraordinary, but there are plenty of others. I take Sierra as an example, which is a contact center-based business, seven quarters to$100 million. dollars. So the growth of these organizations in the US is extraordinary. In the UK, you know, where, you know, we've been an earlier stage investor for a little bit longer, just the growth trajectory is less. And that's partly because we think too much about our current shores, and not enough about the world. And I think the Americans take a global first position, whereas we take, prove it in the UK and then expand overseas.

15:57And that's partly down to a weight of capital and the amount of risk that we take. So, you know, that does put the UK at a disadvantaged despite the fact we've got some of the brightest minds in AI in the UK I think our ambition our global ambition holds us back.

16:11Chris Maguire:And Tony mentioned Anthropic which is in the news at the moment recording this at the end of March and obviously Anthropic's locked in a fairly high profile dispute with a certain Donald Trump and the US Department of Defence over how AI is being deployed. Do you look at that and think you know your investment could be affected by geopolitics and stuff like that? I think actually, ironically, I think Anthropic would be strengthened by that dispute. I think, you know, the Trump administration, I'm sure we've all seen it in the news in the last few days, seems to be losing some legitimacy in the way it's approaching life.

16:48And there seems to be more bravery coming in news reporters, and I understand in Congress. So, you know, I think what, you know, threatening companies, because they want to protect their own intellectual property, I don't think it's a very sensible thing to do. At the end of the day, America wants to grow these companies, they're important companies, and threatening organizations and threatening their supplier base seems to be a regressive step. So I think actually the way OpenAI went about responding, they were heavily criticised when they took over the contract. So I think you'll find some of these, the backlash of some of this activity in the US is coming through.

17:28Importantly, in the last four weeks, big change on sovereignty and the relevance of sovereignty in the world. You've got countries like France thinking about taking out Microsoft Teams and Zoom because of threats of their national security. So the world is thinking differently about the US right now. That's a great opportunity for the UK. It's a great opportunity for businesses like our respective businesses to advise customers and think about how we can become more sovereign in our delivery mechanisms, and that's large language models, it's data centres. Ultimately, for some organisations, it may even be down to a chip level.

18:05So I think there's quite a bit of change coming, which hopefully should present opportunity in Europe. I suppose one of the things that I've often thought around is how the US in technology is dominating the world. It's just almost frustrating. How can the UK regain some power in that bit of the market? Yeah, I think we just have to probably dislocate the trillion-dollar-plus companies because they are so far ahead. And they've got, importantly, such substantial cash machines in Meta, in Google, in Microsoft, in Apple. They've got$100 billion cash machines a year. And the weight of capital that provides to them, bearing in mind you've got Amazon deploying$200 billion of capital.

18:49The GDP of Morocco is$180 billion, as an example. so you've got companies deploying the the capital of an entire country's revenue these are extraordinary times so they are long gone those organizations are going to become 10 10 trillion plus organizations in the fullness of time so we can't compete there you know our biggest company in the uk today is hsbc at about 300 billion pounds in context so we can't go there but that doesn't mean that we can't provide the infrastructure and supporting capabilities that sit around these big players so we have a good part to play you know we're the third largest AI economy in the world I've every hope that we're going to continue to do well and you know that we'll continue to have great UK businesses.

19:33Could you talk about what a good investment opportunity would look like for you now what if you've got the ideal opportunity to invest what would you be looking for? Do you know I think we've made a few mistakes in the last couple of years in our investments and I I think the mistake we've made is thinking about where the ball is rather than where the ball is going to be. And I think right now you've got to look forward. You can't just think about what's in front of you. So at the moment, we've pulled back a little bit around our direct company investing, not on venture. That's full steam at the moment because it's a race against time to get involved with the companies that are going to change society.

20:10And we're making good progress in our journey to do that, not just private companies, but also investing in the public markets. We've got about 80 companies in our sites and we've invested in just over 30 in total. That's just taking strategic investments. Taking strategic investments, so getting a return on our money. When it comes to buying businesses, at this moment it is quite difficult to see forward. I think we perhaps need to let the dust settle a little bit. So we're focused more on organic investment in our core businesses right now rather than inorganic. And that's, again, partly why people are pausing with what's happening in SaaS.

20:46it is difficult at this moment to predict exactly where business models might go to.

20:51Chris Maguire:Can I talk to you about growth? It's something that you've spoken about a lot, and I follow you on LinkedIn as well, and I want to talk to you later about your approach to social media, because I think it's interesting how leaders take the lead on social media platforms as well. So the UK economy failed to grow in January, and it was only 0.1 in December and 0.2 in November, and this was before the conflict in the Middle East as well. You've predicted a recession, and now we've got the curveball of the Iran war. You think we should be aiming for at least 0.5 % growth a quarter. What's your advice to Rachel Reeves to get growth?

21:25Chris Maguire:What would you say to her if she was in the room right now? I'm fortunate to sit in the room sometimes with our politicians, including Rachel, and I think that the government need to start thinking more in a joined-up manner. So if I take the changes in the 24 budget, which probably are the most significant changes to our economy, individually the government you know i do believe there was a black hole we can argue about the size of the number but i think we all understood there were unfunded promises or issues around pay rises that were kicked down the road so whether we agree with 22 billion or not there was definitely an unfunded issue so national insurance in its own right was possibly an area you would have turned to for me i would have undone the the last ditch conservative attempts around reducing employee national insurance that cost 19 billion and we did two changes in uh in january and then in april of 24 that could easily have been undone we'd live with that taxation for 13 years so for me i would have gone there but i understood that she went to national insurance to then change the thresholds which impact part-time working to then change the low pay commissions ratio that they change the minimum wage from 60 to 66 percent of an average salary.

22:37To do those three things in tandem were poorly thought through and the outcome has transpired that we've lost 200 ,000 jobs in retail and hospitality, sectors that were already under substantial pressure. The outcome is that we've now got 5.2 percent heading to 5.5 percent unemployment. The outcome is we've got 400 ,000 young people unfortunately not in work, seeking work and we've taken away many of those part-time jobs and in an environment where we've now got AI coming we haven't looked forward to thinking about where that ball might go and that actually we're now seeing lots of graduate jobs from removed and in fact those graduates that have now got substantial debt behind them are having to go down to those low-paid minimum wage jobs pushing down further the disadvantaged young people that are the very people that the government came into power to protect.

23:27The visibility on joining those type of decisions together, it's one example, has been poor. And, you know, if I was in the room, I think that the government needs to start thinking more holistically about the changes to policy that they're taking, and think about that in an environment where, you know, we are in a changing world. So yes, yeah, the one thing she's done a good job on, despite what's happened to the bond markets in the last two weeks, is to stabilise the bond markets. It is clear that the bond markets are very jittery and Reeves has done a good job in stabilising that. We just saw our 10-year money go above 10 % higher than the Liz Trust moment.

24:03So it's clear that the UK is not regarded well from a bond perspective with limited tolerance. So her fiscal control has been good, but the way in which she's gone about it, unfortunately, has sucked confidence out of the market and has slowed growth down, despite that being their supposed primary lever.

24:22Chris Maguire:I speak to a lot of businesses and um yeah and i interview a lot of businesses and and we were talking about the 2024 budget and there's a guy who runs two coffee shops with his wife it's just just a you know a very practical example and he basically said that look so what's happened with national insurance and minimum wage that the idea is it puts money into the pocket of these members of staff what we do instead of employing him for eight hours we employ him for six because we can't afford to employ him at eight you know now if that is multiplied millions of times then you can see exactly what you've spoken about there as well.

24:54Chris Maguire:I read one of your LinkedIn posts and you said, I'm going to quote you, the developed world is teetering on the brink of recession, and that we're, quote, facing a slow growth environment where the welfare state continues to expand. How do you change that cycle? So, I mean, it's not a UK issue. Germany's in equally a perilous position with their pension liability. France, as we know, is a relatively socialist state, most important country for us, I have to say, but, you know, has been shouldering a huge welfare burden, finance salary pension style burden for many years. So Italy, you know, obviously been in a low growth environment.

25:29The only light I can see in Europe and sort of develop Europe to Spain where the economy is doing well and, you know, lots of confidence in Spain, which is good to see. So, you know, this is a European developed world issue where our welfare states have ballooned to an environment today, 52 % of people in the UK are net beneficiaries of benefits or benefits in kind. So benefits in kind is the NHS as an example. The average take of those people is£27 ,000. So in an environment where we've too few people working, the burden starts going on the shoulders of people that are working. But it doesn't take a rocket scientist to say that you have a deficit in the country if over half your population aren't working or aren't contributing to society.

26:10So, you know, we've got to change the welfare system. I mean, tweaking the taxation system, we're on a journey, we're at 38 % today of GDP tax, we're on a journey through 40%, that's going to happen. So whoever's in power, if it's reform in power, it's going to happen. We're going to have to balance the books. The question is, what do we do next? And the welfare system, today it's 330 billion, end of the decade, 400 billion. The only way to deal with that is structural reform. I argue for cross-party structural reform, because I think this is too big an issue to shoulder for one party and you know we really need to be thinking about the country not about politics and work out how over a period of time we transition people's reliance on welfare it's not right to stop that overnight we need a transitionary period which might be five or ten years to get the country into a better position that includes thinking ahead around around things like sovereign wealth funds and creating long-term pension liabilities off the books.

27:07These are not simple things to fix because today£175 billion of that number is pensions. And that's a combination of triple lock being a political ball that everyone's used, that we can't afford. And it's things like an unfunded state pensions and final salary pensions in the government where we're underpaying our civil servants or underpaying our public sector workers in lieu of a final salary pension. And what we need to do is rebalance that with higher salaries and and a defined benefits pension scheme so these are like really complicated issues to fix and that's why i say i think it needs cross-party support you won't be surprised to say i'm lucky again to meet not just the current government but other people from the opposition there's the cynicism whenever you mention that because they want their own political message but i really firmly believe this is a structural problem the country has and it needs more than a governing party to try and get behind it.

28:01Chris Maguire:You're not tempted to stand from Atomare somewhere? No, no, it's too complicated a world for me, but happy to comment on the sidelines. Just in terms of LinkedIn, like I mentioned, you know, I like LinkedIn. It's the only social platform that I really immerse myself in. And Jonathan to my left here as well, he's very good at it and gets lots of engagement as well. How important is it for leaders to be visible in terms of on social media platforms? What's your take on it? Because not everyone is. Yeah, no, I think, shouldn't forget, first of all, it's a peer-to-peer network. So it's not a company-to-company network.

28:37It's an individual working in a company, talking to another individual in another company. I think businesses often get confused about that. And your own people as well. Yeah, and your own people. So I find it an incredibly valuable tool. I was a real naysayer until two years ago. I saw it as an environment where I was just asked for things rather than I was perhaps promoting things. And when you change your mindset to say, this is about a communication tool, as you rightly say, Jonathan, to your people and also to the people that you're trying to influence, it is by far the most powerful business tool that I know of to do that.

29:13In a company, and I'm advocating this today, in SCC, our main trading company, which doesn't particularly have, if you like, personalities on LinkedIn, it really needs, in a big business like A &M or a big business like ours, It really needs a suite of people to be delivering messages. You need to be acting in some kind of coordinated way so that you're not crossing over each other. So as with anything else in life on a comms basis, it needs a strategy and probably needs investment. And certainly we're doing both of those things. It also requires, you know, people to think. And, you know, I find actually when you, you know, when you start, I didn't discover writing until three years ago, and I thoroughly enjoy writing now, and lucky to have a column in The Times monthly, but actually it's really cathartic it's really important to form your thoughts and the more you think you know logically about what you're trying to say and what your business is trying to deliver to your customers or your other stakeholders it's a really powerful tool what's your approach to it yeah so i was the same i'd never really used it i saw i sort of had seen it but i didn't really use it until i spent a year in the garden and i happened to make a few posts i thought people wonder where i've gone and um so i happened to make a couple of posts that when you've got written massive much great you know 200 ,000 people read the first one apparently um and and that so i thought oh gosh people are engaging with me yes um and so i've i started at a &m we we look quite carefully at brand building because obviously one of the things we've been doing in our corporate finance business is brand building and it seems that people don't really buy in that type of media people don't really buy into companies telling them things as opposed to people and but but actually put if you can build a sort of relationship with the people who are following you you you I suppose you build a personal brand and and I've certainly just I'm no expert in LinkedIn but but I've certainly noticed a lot of the people I meet who I've never met before have followed me and read things on LinkedIn and they know where I've been.

31:23And so I think it's a great way to communicate. But you just have to be careful because obviously you are communicating to a lot of people. So you need to think about it. You need to think about it, yeah.