Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: It's Thursday.
Speaker 3: I'm not going to the JP Morgan pub this Thursday week.
Speaker 2: I was fun.
Speaker 1: You were on the roof.
Speaker 2: We went to the roof. It was pretty cool.
Speaker 3: Like the very top part is like this obelisk into
Speaker 3: the sky, so we were gazing up at it and
Speaker 3: it was all that up.
Speaker 2: It was so cool. It was.
Speaker 1: God.
Speaker 2: I wanted to like free solo it, but it was
Speaker 2: so cold.
Speaker 3: It was.
Speaker 1: Rooftop.
Speaker 3: It was so snowy, and I see it was pretty terrified.
Speaker 3: It was totally safe.
Speaker 2: There was a fence. There was a fence. I'm sure
Speaker 2: there is, but.
Speaker 1: You were on the roof.
Speaker 2: I was. It was like a quick a quick lookout.
Speaker 3: You know.
Speaker 2: I waved to New Jersey. Then we got back in. God,
Speaker 2: it was so cool. Though, we have to go. We
Speaker 2: have to You really have to do.
Speaker 1: As you're talking about this, get some email invites being.
Speaker 3: Like come, yeah, well we need to take up one
Speaker 3: of them.
Speaker 2: Yeah, is there anything you got?
Speaker 1: I'm off the week after next Yeah, oh.
Speaker 2: My god, wait what week are you off?
Speaker 1: The sixteenth?
Speaker 2: Yikes, I'm off the week after that.
Speaker 1: Two weeks off. It's like very satisfying to have the end.
Speaker 2: In sight, you know, Yeah, no, I feel that.
Speaker 1: No, of course, I live for my work.
Speaker 2: And we'll be of course where you go. I mean,
Speaker 2: we can talk about this later.
Speaker 1: I'll tell you off, Mike. I'm going somewhere warm.
Speaker 2: I'm going somewhere cold.
Speaker 1: Nice. Yeah, all right, Hello and welcome to The Money
Speaker 1: Stuff Podcast, your weekly podcast where we talk about stuff
Speaker 1: related to money. I'm Att Levine and I write the
Speaker 1: Money Stuff column for Bloomberg Opinion.
Speaker 3: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 3: an anchor for Bloomberg Television.
Speaker 1: We had an under the wire last week that that
Speaker 1: SpaceX and x I high were emerging.
Speaker 3: We were ahead of the curve, so slightly somewhere nearly
Speaker 3: on the curve.
Speaker 1: We're on the curve.
Speaker 2: I was going to say, we're picking up behind the curve.
Speaker 2: We're a little bit.
Speaker 3: We're picking up where we left off though, Yes, and
Speaker 3: that is on h It happened, SpaceX, It happened.
Speaker 1: This is the thing. I come from the world of
Speaker 1: public company mergers, where like, you negotiate a deal for
Speaker 1: a few weeks, and you sign a deal, and then
Speaker 1: you announce the deal and then like six months later
Speaker 1: it closes and the Elon Musk has done that. He
Speaker 1: did the Twitter merger, which took at least forty years
Speaker 1: off my life. But when he decides to merge Xai
Speaker 1: and SpaceX, like from a glimmer in his eye to
Speaker 1: the deal is closed, is like, I don't know what
Speaker 1: four days like, Yeah, it's really incredible speed.
Speaker 3: Well, as you sort of lay out in the newsletter,
Speaker 3: he's negotiating with himself and then signing it himself.
Speaker 1: Yeah, it's great. It'll be interesting to learn from the
Speaker 1: eventual IPO filing. I don't know how much of these
Speaker 1: companies Elon Musk owns, right, But he's not the sole
Speaker 1: shareholder of either one. Right, there's a lot of employees,
Speaker 1: there's outside investors. But it seems like he owns or
Speaker 1: at least a majority of both companies, or at least
Speaker 1: the majority of the voting power of both companies, because
Speaker 1: he could just kind of do the merger himself. He's
Speaker 1: the controlling executive of both, he controls the board of both,
Speaker 1: and he's most importantly the controlling sholder of both. So
Speaker 1: like when the deal is submitted to a shareholder vote,
Speaker 1: it's submitted to him, and he says yes, and so
Speaker 1: you can do it really fast. In addition to him
Speaker 1: being legally the controlling shareholder, also like all of the
Speaker 1: shareholders both love him and fear him. My sense is
Speaker 1: this is true. You can imagine some SpaceX shelders saying
Speaker 1: SpaceX is a very valuable company. It is worth more
Speaker 1: than four times as much as x Ai. They say
Speaker 1: it's a one point twenty five trillion dollars valuation for
Speaker 1: the commanded company, one trillion for SpaceX, I'm two hundred
Speaker 1: and fifty billion for Xai. Those numbers are kind of
Speaker 1: fake because no money is changing hands, so there's no
Speaker 1: actual dollar value.
Speaker 3: Right.
Speaker 1: Those numbers are like kind of in the ballpark of
Speaker 1: what other transactions have valued the met But this doesn't,
Speaker 1: you know, whatever he wants, but the proportion matters, right,
Speaker 1: Like if you say SpaceX is a trillion dollar company,
Speaker 1: in Xai is a trillion dollar company, then Xai gets
Speaker 1: half the company. If you say you know what they did,
Speaker 1: then Xai gets twenty percent of the company. And you
Speaker 1: can imagine that SpaceX shelter like say an employee or
Speaker 1: former employee saying that's not right like SpaceX is good.
Speaker 1: I like SpaceX, I don't like Xai, which is, you know,
Speaker 1: to some extent the successor of Twitter, and being mad
Speaker 1: about the deal price, but like there's nothing they can do,
Speaker 1: nothing to do at all. I wrote that this is
Speaker 1: made easier by the fact that they are private companies. Yes,
Speaker 1: all of Elon Musks companies either reformed in or have
Speaker 1: kind of moved to Texas, so they're incorporated in Texas,
Speaker 1: and nobody really knows what exactly would happen if these
Speaker 1: were Texas public companies. But Texas does allow you to
Speaker 1: kind of prevent small shareholders from bringing derivative lawsuits. So
Speaker 1: there's some chance that he could do this kind of
Speaker 1: stuff even with two public companies, or there's some chance,
Speaker 1: some chance when he emerges Tesla and SpaceX.
Speaker 2: Yeah, then we'll have there's some.
Speaker 1: Chance that like no one will be able to say
Speaker 1: anything about it. We'll see, we'll see.
Speaker 3: I was going to say, I wish we were about
Speaker 3: to find out in this case, you know, if one
Speaker 3: of them was public. But it's a good point that eventually,
Speaker 3: when we do finally reach the convergence and SpaceX and
Speaker 3: Tesla merged.
Speaker 1: It's going to Ruin to run a vacation of mine.
Speaker 1: I wonder if it's the one in two weeks, but yeah,
Speaker 1: it's gonna be great.
Speaker 2: Yeah.
Speaker 3: I also like the point made in here that you know,
Speaker 3: the narrative has been that SpaceX is going to fund
Speaker 3: building data centers in space, or it's going to fund
Speaker 3: XAI in some form, but it's pointed out that SpaceX
Speaker 3: generated around fifteen billion dollars in revenue last year. At
Speaker 3: this point made by Martin Piers, it's more about the
Speaker 3: fund raising ability of SpaceX.
Speaker 1: Yeah, SpaceX is a self funding company, right. SpaceX has
Speaker 1: done recent employee tenders where the company itself has used
Speaker 1: its free cash flow to buy stockback from employees. And
Speaker 1: so why does SpaceX need to go public? Well, maybe
Speaker 1: they have like some vast new rocket program that they
Speaker 1: need to fund, but like, really it's to fund data
Speaker 1: centers in space.
Speaker 4: Right.
Speaker 1: They don't necessarily need public money to shoot rockets into space.
Speaker 1: They need it to sweep eaxs.
Speaker 2: This is like a little stuff in space.
Speaker 1: Like it probably makes sense from a corporate finance perspective
Speaker 1: for SpaceX as SpaceX to be public, but like it
Speaker 1: really helps to raise money for XAI or for AI
Speaker 1: type activities or data centers in space, and so this
Speaker 1: is a way for Elon Musk to take these somehow
Speaker 1: even more capital intensive business than shooting rockets into space
Speaker 1: and sweeping it into a fundraising are or not.
Speaker 3: It is amazing to me how many people and ourselves
Speaker 3: included kind of are saying data centers in space with
Speaker 3: a straight face. Orbital data centers is also a phrase
Speaker 3: that I've heard.
Speaker 1: Yeah, a lot of people are very very skeptical about
Speaker 1: the idea of data centers in space.
Speaker 3: Well, I keep just thinking about where else can we
Speaker 3: put data centers? Why do they have to go in space?
Speaker 3: Would the ocean be easier in terms of weird frontiers
Speaker 3: where we could put data centers? Like how did we
Speaker 3: land on space as a realistic option.
Speaker 1: I don't know that anyone's light it on it as
Speaker 1: a realistic option. But Elon Musk I really like science
Speaker 1: fiction for sure. He references is actually in the space
Speaker 1: XA merger announcement. There's a notion that, like there are
Speaker 1: some civilizations that harness energy from their planet. Just look
Speaker 1: so tired.
Speaker 2: No, I'm here, I'm here.
Speaker 1: There's some civilizations they can harness some large proportion of
Speaker 1: the energy on their planet. But then there are the
Speaker 1: better civilizations that can harness most of the energy of
Speaker 1: the star they orbit, and then they're even better the Sun. Yeah,
Speaker 1: and then they're even better civilizations that can harness like
Speaker 1: whole galaxies of energy. And so if you have all
Speaker 1: of the energy of the Sun at your disposal, you
Speaker 1: can like travel between galaxies or whatever. And so that
Speaker 1: sounds so stupid, but Elon Musk, like one of his
Speaker 1: main dreams is to honest all of the energy of
Speaker 1: the Sun. And to do that, you put I'm sorry,
Speaker 1: you put a shellow satellites around the Sun that like
Speaker 1: take all of the energy from the Sun so that
Speaker 1: they run the data centers, so like you know, a
Speaker 1: little beam of light gets through so that we can
Speaker 1: like live on Earth and the rest of the Sun's
Speaker 1: energy goes to the data centers. So Elon Musk can
Speaker 1: be like the data centers are harnessing the power of
Speaker 1: the Sun.
Speaker 2: This is, honest to God, the first time I've ever
Speaker 2: heard of this.
Speaker 1: Yeah, I learned of it from the announcement that references
Speaker 1: the Russian scientists who who came up with these tiers
Speaker 1: of civilizations and then I read a portion of his
Speaker 1: Wikipedia page and now I'm telling you and you're weeping.
Speaker 3: Well, the thing is, I'm feeling really sick. I'm like
Speaker 3: brewing something right now. I'm also reading this like really
Speaker 3: trippy garbage like magic slash science fiction book right now,
Speaker 3: and like I'm at the point I'm eighty one percent
Speaker 3: of the way through it, so I'm going to finish it.
Speaker 3: But it's basically just like kind of garbage, Like you
Speaker 3: just threw a breath right now, and it's like I.
Speaker 1: Read this badgeic sci fi garbage and then you come
Speaker 1: into work and it's more of it.
Speaker 2: I feel like I'm dissociating. Am I on the pass?
Speaker 3: Yeah like that?
Speaker 1: But anyway, that's why.
Speaker 3: Anyway, thank you for walking me through that.
Speaker 2: I had just realized we're trying to harness the energy
Speaker 2: of the sun.
Speaker 1: So they get a grand sci fi level. That's the
Speaker 1: intention in terms of like, well the data centers work,
Speaker 1: like yeah, I done knows, Yeah whatever, you know who
Speaker 1: I want to spend a minute talking about who Twitter's
Speaker 1: bondle this?
Speaker 3: Yeah?
Speaker 1: Do you remember when people, when people like me were like, man,
Speaker 1: what a bad deal to agree to fund Elon's Twitter
Speaker 1: buyout with debt that like now trade that yeah, back
Speaker 1: then traded like you know, forty cents on the doll.
Speaker 2: A short sighted thing to say.
Speaker 1: Now if Twitter needs to pay back, like it's like
Speaker 1: thirteen billion dollars of debt. Like like that's like you know,
Speaker 1: one minute of fundraising for Twitter, which is now called
Speaker 1: the SpaceX quaint. Anyway, everyone always.
Speaker 2: Wins, Everyone always wins.
Speaker 1: Yeah, I've read about this a little bit this week too.
Speaker 1: The SpaceX IPO team are working on changing the rules
Speaker 1: for index eligibility so that SpaceX can be put into
Speaker 1: at least some big stock indexes earlier than like normally
Speaker 1: for like that and as like one hundred ear the
Speaker 1: SMP three months. Yeah, it's like some some period of months,
Speaker 1: and they want it to be fast. They're going to
Speaker 1: be in the business in the next year of moving
Speaker 1: an enormous amount of stock from like early SpaceX investors
Speaker 1: to index funds, and they want to move that stock efficiently.
Speaker 2: It makes lot of sense.
Speaker 1: It does. It can't really fault it.
Speaker 3: I will say it's interesting that like SpaceX in terms
Speaker 3: of private companies is kind of in a league of
Speaker 3: its own, like sort of.
Speaker 1: Like it's becoming more of a thing, right. I mean,
Speaker 1: one reason that it seems like they're having traction with
Speaker 1: like the index companies, there's a backlog behind them of
Speaker 1: other multi hundred billion dollar companies that everyone wants to owner.
Speaker 1: It's like, yeah, this should be in the index as
Speaker 1: soon as they can.
Speaker 2: Well, part of the reason I say this it relates
Speaker 2: back to ETFs. Don't worry for sure.
Speaker 1: Sure.
Speaker 3: Barron Capital which is a firm founded by Ron barn
Speaker 3: who is like a long time Elon Musk investor. He
Speaker 3: loves Elon Musk companies. They recently launched an ETF. The
Speaker 3: ticker is Ron b which I love, and they own
Speaker 3: a pretty sizable chunk of SpaceX in the ETF. The
Speaker 3: number of shares that they hold stays static, but as
Speaker 3: the asset levels of the funds go around, some days
Speaker 3: it'll be like twenty two percent of the fund, some
Speaker 3: days it'll be eleven percent of the fund, which is
Speaker 3: interesting because the SEC has a fifteen percent cap on
Speaker 3: a liquid assets for ETFs, but the company confirmed that
Speaker 3: they classify it as less liquid. There's four liquidity tiers,
Speaker 3: highly liquid, moderately less liquid, and then E liquid. But
Speaker 3: SpaceX for their purposes by their definition is less liquid.
Speaker 1: I don't think pretty quick.
Speaker 2: Yeah, that's the thing that's kind of what I mean.
Speaker 3: It's in like a league of its own. It's a
Speaker 3: private company, but it's pretty liquid and it makes sense.
Speaker 1: That attention to it, and it's like everyone knows that
Speaker 1: IPI is coming.
Speaker 4: Yeah, should we talk about dats?
Speaker 2: Yeah?
Speaker 3: I was wondering when we were going to talk about
Speaker 3: closed end fund activism again, it's been a while.
Speaker 4: Have we talked about think about the dawn of this podcast?
Speaker 1: Oh?
Speaker 2: Yeah, I don't know if we just talked about it
Speaker 2: a lot in for ten podcasts, but I'm pretty sure
Speaker 2: we talked about it on real podcasts.
Speaker 1: You and I have talked microphones about clos and close
Speaker 1: in fund activism, close and fund activism as one, I
Speaker 1: guess we've talked about the Blackmen closed un funds.
Speaker 3: One.
Speaker 2: We've definitely talked about boas Weinstein.
Speaker 1: On the front of the pod. The leading closed unfund
Speaker 1: activists or closing fund activism is like, you know, you
Speaker 1: have a closed end fund, which is a company that
Speaker 1: buys investments and also lists its own shares on the
Speaker 1: public slock market, and like sometimes they closed end fund
Speaker 1: the fund's own shares will trade at a discount to
Speaker 1: the net asset value, and then some activists will buy
Speaker 1: up some shares and run a proxy fight and try
Speaker 1: to kick out the management of the fund so that
Speaker 1: they can liquidate the fund, sell all the underlying stuff
Speaker 1: at net asset value and like return money to the
Speaker 1: shareholders and capture that discount. This is the thing, you know,
Speaker 1: it's like controversial, but as it gets you know, yelled
Speaker 1: at by Blackrock or wherever, sometimes activists wins, sometimes they lose.
Speaker 1: Sometimes the underlying fund managers make the case that there's
Speaker 1: actually some long term value and that it is short
Speaker 1: sighted to liquidate the fund and capture the discount. Sometimes
Speaker 1: that case doesn't work anyway. DATS Digital asset treasury companies
Speaker 1: were all the raids last year, led by Strategy formerly
Speaker 1: micro Strategy, which is you know a huge pot of bitcoins,
Speaker 1: which I know we gotta talk about strategy too, but
Speaker 1: let's talky about activism first. All these companies were formed
Speaker 1: that would buy crypto like bitcoin are you know, different
Speaker 1: companies specialized in different things, and they would make it
Speaker 1: have a big pot of crypto and it would trade
Speaker 1: it like a huge premium to the net asset value.
Speaker 1: And so everyone did this trade like in summer of
Speaker 1: last year, and then it collapsed, like the prices came down,
Speaker 1: but also the premiums collapse, and now a lot of
Speaker 1: these doubts are trading it discounts to net asset value.
Speaker 1: And so now you're starting to see glimmers of activism
Speaker 1: against stats where someone will be like, I can buy
Speaker 1: stock in this pot of bitcoin in the stock traits
Speaker 1: at like eighty percent of none asset value. So if
Speaker 1: I pay eighty cents, I can get a dollar worth
Speaker 1: a bitcoin. And the only problem is I got to
Speaker 1: crack open the pot and take out the bitcoin. And
Speaker 1: so you do things like pressure the management to do
Speaker 1: buybacks or maybe lots of proxy facs. We haven't seen
Speaker 1: proxy fights yet, but like we've seen activist filings, and
Speaker 1: the proxy fights will be so good because if you
Speaker 1: run a digital ASSEID treasury company, like yeah, you kind
Speaker 1: of you know, colorful character, and if you're taking a
Speaker 1: run at them as an activist, you're probably kind of
Speaker 1: a colorful character too, and so there'll be some good
Speaker 1: proxy fights.
Speaker 2: I have two things, maybe three.
Speaker 3: I think this is really fun, like the concept of
Speaker 3: bringing the closed end fund activism playbook to crypto, because
Speaker 3: I feel like crypto market structure and equity market structure
Speaker 3: they blend together in some ways, or at least parallel
Speaker 3: each other, and this is just another way.
Speaker 1: Well, but this is to be clear, just equity, like
Speaker 1: these are companies with stocks. And in fact, I think
Speaker 1: the controversy is that a lot of digital aid treasury
Speaker 1: companists will say, no, no, no, we're not a close
Speaker 1: that fund. We're operating business. We're creating a lot of value.
Speaker 1: For you. To just take our crypto and liquidate it
Speaker 1: to capture the discount is totally destructive of long term value.
Speaker 1: And then other people are like, no, you're a product bitcoins.
Speaker 1: Come on, yeah, we'll see, we'll see.
Speaker 3: Who index classification. They have to be operating businesses.
Speaker 1: Yeah, they argue that they're operating businesses, and so far
Speaker 1: they have more or less with the index classifiers.
Speaker 3: The right to you with the might of the pen,
Speaker 3: a swipe of the keyboard. The other thing is this
Speaker 3: brought back just a myriad of memories of the gray
Speaker 3: scale Bitcoin trust.
Speaker 2: Yeah, sure that did operate as.
Speaker 3: A closing fund, and they are so eager to convert
Speaker 3: it to an ETF so they could get rid of
Speaker 3: their discount.
Speaker 1: Yeah, and they had a weirder governance and so you
Speaker 1: couldn't like just do a proxy fight. But like people
Speaker 1: were mad at them for not closing the discount earlier,
Speaker 1: and then they did, in fact want to convert to
Speaker 1: a and then they did. I know that your next
Speaker 1: sentence will be these dats should convert to eds, but
Speaker 1: I disagree and they disagree.
Speaker 2: So yeah, so I'm very.
Speaker 1: Excited for like a wave of this, in part because
Speaker 1: like one thing that is happening is the price of
Speaker 1: bitcoin is collapsing, Like the premiums of these dats are collapsing.
Speaker 1: And today Thursday, February fifth, Strategy was at least at
Speaker 1: some point trading below net asset value.
Speaker 3: I mean I think their break even or whatever you
Speaker 3: want to call it is seventy six thousand dollars per
Speaker 3: bitcoin or about there.
Speaker 1: Well there's two things. There's like their cost pass yeah,
Speaker 1: which like if they trade below their cost basis, then
Speaker 1: arguably their bitcoin buying has been money losing, right yeah, yeah,
Speaker 1: And like they're proxy for bitcoins. That's fine, like if
Speaker 1: bitcoin goes down, like they'll go down. But the other
Speaker 1: thing that's happening is like their stock at least briefly
Speaker 1: traded below net acid value. The whole point of strategy
Speaker 1: is like paying a premium to own strategy because they
Speaker 1: were doing something that made their pot of bitcoins more
Speaker 1: valuable than just the pot of bitcoins, and now the
Speaker 1: market has completely moved away from that, and now they
Speaker 1: trade it roughly or even a little below the value
Speaker 1: of their bitcoins.
Speaker 3: I'm actually scared to check where bitcoin is right now.
Speaker 3: When we stepped into this recording, it was down like
Speaker 3: ten percent on the day I think to it was like.
Speaker 1: At sixty five thousand dollars.
Speaker 2: Yeah, yeah, yeah, which is.
Speaker 1: Down, Like yeah, it's it's been a b lovebath. I'm
Speaker 1: like part of what's happening. There's reporting of like you know,
Speaker 1: for sty leveraging or whatever, but like one thing that's
Speaker 1: happening is like a big chunk of bitcoin is held
Speaker 1: by strategy particularly and deats in general, and you do
Speaker 1: wonder what will happen with.
Speaker 2: Those, right, I mean I do wonder? Can you tell me?
Speaker 3: Well?
Speaker 1: So, like, for instance, the dat that I wrote about
Speaker 1: this week that faced an activist is a bitcoin one
Speaker 1: called empery, and it has announced that it will either
Speaker 1: take you know, borrow money or sell bitcoming, but it
Speaker 1: might sell bitcoin to byvax stock. I think selling bitcoin
Speaker 1: to buy back stock, if you're adat that trades at
Speaker 1: a discount, is just like a straightforwardly good trade. And
Speaker 1: then like you have Strategy, which is enormous, has huge
Speaker 1: cash obligations you know to pay prefer dividends and stuff.
Speaker 1: Because it's taken out all this debt and preferred stock
Speaker 1: to buy bitcoin. How will they fund that? Well, if
Speaker 1: there's stock trades at a premium to that it's underlying
Speaker 1: as a value, then they should sell stock to fund
Speaker 1: that stuff, which is embarrassing, But fine, if the stock
Speaker 1: trades at a discount, I mean they've sometimes said they
Speaker 1: might sell bitcoin, and sometimes so they won't. But like,
Speaker 1: if you're stocks trading at a discount and you need
Speaker 1: cash to pay your debt, like maybe you sell some
Speaker 1: bitcoin and then like is every dbt you know that
Speaker 1: probably provided a lot of buying pressure on the way up.
Speaker 1: Are they providing selling pressure on the way down?
Speaker 2: Well, that's the thing.
Speaker 3: I feel like if a debt such as Strategy came
Speaker 3: out and sold even like a really insignificant amount of bitcoin.
Speaker 2: What that would be for sentiment.
Speaker 1: Yeah, it's not good. It's potentially a lot of actual volume.
Speaker 1: But yeah, it's a saith don't matter, it's it's great.
Speaker 3: Yeah, I would love if boas Weinstein started dabbling in
Speaker 3: a little bit of debt activism.
Speaker 2: Does it make sense for a plastody.
Speaker 1: It's the same trade, yeah, fun actively, it's the same trade.
Speaker 2: I'm going to send him this podcast, all right.
Speaker 1: I think that one thing that Bo's Wanstein has done
Speaker 1: is he's tilted at funds run by companies like black Rock,
Speaker 1: where black Rock for a long time has talked a
Speaker 1: lot about good governance and Bo has has kind of
Speaker 1: used those words against them and said, like, you're not
Speaker 1: doing good governance. You're like stifling shareholders in your clothes
Speaker 1: and funds. I think you're like moral and political playbook
Speaker 1: would be different with the debt because like they don't
Speaker 1: care about cherholder governance.
Speaker 3: Something else, right, some AI generated and some other him
Speaker 3: on an orange bole.
Speaker 1: Your rhetoric is different when you're taking on a debt CEO.
Speaker 1: But like he should, the trade is they can always
Speaker 1: the trade speaking of bad first sentiment should talk me
Speaker 1: about the god?
Speaker 3: Yeah, I mean software stad. I didn't know that until
Speaker 3: this week. Apparently this I mean, I guess it was
Speaker 3: theoretically started by anthropic I believe it was coming out
Speaker 3: with some tool for lawyers.
Speaker 1: There's like some catalyst moment, but it's just been like
Speaker 1: a drumbeat of like AI doing stuff that used to
Speaker 1: be sort of hard specialized. It's like the thing people
Speaker 1: used to say about like Google and Apple that like
Speaker 1: you thought you'd built a business, but actually built like
Speaker 1: a button, you know. Like it turns out that a
Speaker 1: lot of like business the business software is a thing
Speaker 1: that AI can either replicate, you know, individually for each
Speaker 1: company or just like you know, do the functions of
Speaker 1: And so there's a lot of worry about a lot
Speaker 1: of software as or service companies that they might not
Speaker 1: be competitive in a world of AI.
Speaker 2: Yeah, which I get, you know, like that's a real fear.
Speaker 3: Can you talk to me about the private equity angle,
Speaker 3: because that's been the other thing BDCs have been absolutely
Speaker 3: in the toilet amidst this SaaS apocalypse.
Speaker 1: Yeah, because like for a while, SaaS seemed like a
Speaker 1: really good business. Where you sell software at a company
Speaker 1: is you charge them recurring license and so you had
Speaker 1: this really good stable cash flow. And when you have
Speaker 1: a business with really good stable cash flow, what happens
Speaker 1: is private equity wants to buy it and they want
Speaker 1: to lever it up because stable cash flows are good
Speaker 1: for servicing debt and becoming good private equity businesses. And
Speaker 1: then you have this problem where private equity and private credit,
Speaker 1: which like provides the leverage, are overweight sort of SaaS
Speaker 1: companies because they're the safe companies, and then it turns
Speaker 1: out they're not safe, like all of this stuff that is,
Speaker 1: you know, it was meant to be like sort of safe,
Speaker 1: stable recurring revenue like conservative investments, and now turns out
Speaker 1: to be kind of risky.
Speaker 3: Right.
Speaker 1: The Bloomberg story about this is that software is the
Speaker 1: largest sector exposer for BDCs, so like credit business development companies,
Speaker 1: it's around twenty percent of portfolios.
Speaker 3: Right.
Speaker 1: Credit under like you're underwriting weird companies, like you're underwriting biots,
Speaker 1: and you're like, oh, this company, like you know, can
Speaker 1: show me their contracts where they have like all this
Speaker 1: like very stable recurring revenue, and so you're happy to
Speaker 1: underwrite that and have it in your portfolio, and that
Speaker 1: maybe is.
Speaker 3: Not that the table Well, on that twenty percent figure.
Speaker 3: I think that came from Barclays. The story also points
Speaker 3: out that it's possible slash maybe probable, that it's higher
Speaker 3: than that because you think about and this is a
Speaker 3: quote from an analyst at Raymond James. If your software
Speaker 3: business is in healthcare, the fund classifies it as a
Speaker 3: healthcare exposure. The software exposure is meaningfully higher than it looks.
Speaker 1: Yeah, so because like every business of a.
Speaker 3: Software Yeah, it's kind of been where we've where the
Speaker 3: tide has been going over the past however many decades.
Speaker 1: Right, it's not software, right, it's like how much of
Speaker 1: like all of business will be eaten by AI? Right,
Speaker 1: how many businesses would become irrelevant? Right? I mean we've
Speaker 1: talked about like consulting and investment banking, right, and certainly journalists, right,
Speaker 1: certainly all these things. Right, And so like a lot
Speaker 1: of businesses these days are more less software businesses, and
Speaker 1: it's the extent they're put out of business by AI,
Speaker 1: then that'll be bad for their shareholders and lenders.
Speaker 4: Right.
Speaker 1: Yeah, I don't know. This is kind of like the
Speaker 1: AI thing that people are wonnering about, right.
Speaker 3: Yeah, the existential Oh my god, I have to say
Speaker 3: it's interesting. I mean the story on the terminal, which
Speaker 3: is great private equities giant software bet has been up
Speaker 3: ended by AI. It points out that some firms have
Speaker 3: hired consultants to check their portfolios for businesses that could
Speaker 3: be vulnerable.
Speaker 1: They don't know, man, But also they could just ask,
Speaker 1: like me, it's me, I'm vulnerable.
Speaker 3: They could ask chatchibt to do that analysis for them.
Speaker 3: Also they've been i mean, private credit in particular has
Speaker 3: been you know, funding the AI build out, Like.
Speaker 1: The AI isn't one of these things will work out.
Speaker 3: But it's not a new concept to them. It's just
Speaker 3: weird that it seems like the way that the market
Speaker 3: is now positing that you know, none of these alternative
Speaker 3: asset managers have questions whether I'm not holdings are maybe vulnerable.
Speaker 1: I think that like people have different views on the
Speaker 1: timeframe of like AI disrupting every industry, right.
Speaker 2: Yeah.
Speaker 1: The thing that happened this week is like particular cloud
Speaker 1: products are introduced that look like they're further ahead than
Speaker 1: people thought, and that they could replace the faster than
Speaker 1: people thought. I think people had a mindset of, like
Speaker 1: we are financing this huge data center build out so
Speaker 1: that in X years AI will eat the world, right,
Speaker 1: and like for the next few years, nothing will be eaten, right,
Speaker 1: and it's like, oh, things might get eaten.
Speaker 2: Fast than you think.
Speaker 1: Also, by the way, if your conclusion from this week
Speaker 1: is AI has actually already completely eaten all of the
Speaker 1: software sector, then like maybe you could slow the data
Speaker 1: center build out because you've accomplished a lot with the
Speaker 1: data centers we have.
Speaker 2: Yeah, maybe we are overbuilding.
Speaker 1: That could be a takeaway. And I don't think that's
Speaker 1: the band takeaway here.
Speaker 3: Everyone's too busy selling software. Yeah, so Areas in Blue
Speaker 3: al and also a whole host of these other bdceizures
Speaker 3: that are just getting crushed did report earnings, and are
Speaker 3: CEO made the point that only about nine percent of
Speaker 3: ares Is loan assets were two software firms. So everyone's
Speaker 3: coming out and trying to say that their actual risk
Speaker 3: here is pretty low. It is interesting that this just
Speaker 3: feels like very much. Let's just throw out the whole bathtub,
Speaker 3: all the babies put them in it, and let's throw
Speaker 3: it out the windows.
Speaker 1: Yeah, I mean, you know, one thing we've talked about
Speaker 1: and I've written about a lot is private credit is
Speaker 1: structurally a pretty safe business, right, like structurally pretty safe
Speaker 1: right on. Nothing's perfect, right, but they have equity funding,
Speaker 1: they have long term funding. They don't they don't have
Speaker 1: maybe quite the marked market discipline that some other investment
Speaker 1: firms might have. And so it is true that like
Speaker 1: if there is a three week panic about software and
Speaker 1: then everyone's like, actually we go overreacted, the private credit
Speaker 1: firms can really ride that out like quite easily, right, Yeah,
Speaker 1: Like the BDC's thought prayer goes down, comes back up.
Speaker 1: There's no like run on banks, right, there's no like
Speaker 1: loss of funding. So this is just like try to
Speaker 1: manage perception and tough it out right now, it could change, right,
Speaker 1: but like, for now, it's a fairly safe funding model.
Speaker 1: But at the end of the day the LENDSI to
Speaker 1: pay over, they don't, right, Yeah, Like it's a safe
Speaker 1: funding model, and it seems like SaaS company should be
Speaker 1: a fairly safe credit to invest today. But if that
Speaker 1: turns out to be row, it's bad.
Speaker 3: Well there's a whole bunch of them on sale right now.
Speaker 2: So go Nuts definitely won.
Speaker 1: And that was the Money Stuff podcast.
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