The Exchanges

Q want to dive into the public versus private though, because to me, ah, we joked before, but you know, everything that I buy, you should short. I'm the world's worst public markets investor, and they're so paradoxical in my mind. So tell me, why do you think that actually the framing shouldn't be so different for public versus private? Why do you not believe in segregating the two like this?

A I really think that the public private divide is an artifact of the financial universe rather than anything that you would come up with if you were thinking about investment or company formation from first principles. Um, when you think about what matters for a good business, uh, you know, a big addressable market, a great management team, robust competitive advantage, a fantastic business model. Well, these things are true, whether you're talking about private or public companies. And the only thing that changes when a business goes from being private to being public is that its shares start trading in a slightly different way. I don't think there's really much information in that that tells you that you should delineate investing on those terms. And so we just try to look for great companies and own them for a really long time, um, and try to break down what we believe is this artificial divide between public and private businesses.

AI assessment note: “public private divide is an artifact of the financial universe rather than anything”

Q How many companies have actually, I've had quite a few now, Where it's like, they've had acquisitions and I've got like, 50 cents on the dollar back. And so it's like, it's not a bankruptcy, but when you look at that cohort, is there many in that cohort?

A Very few of our investments get acquired. Um, and that's partly because we, we steer away from any company where we get a whiff of, um, them potentially being bought. Um, I think it kind of comes back to what we're trying to achieve here. We're not trying to find a company that can be bought For, you know, one or two X in a year or two, we're trying to find companies that over a five, 10, 15 year view can go on to become five, 10, 20 times their, their current size. And so that kind of skews us towards companies that we, that we believe have the potential, but also where you have a management team who has a level of ambition to keep it private. So I keep, keep the business independent, um, and grow it independently rather than looking for an M and a exit.

AI assessment note: “Very few of our investments get acquired.”

Q Um, before we dive into the public versus private kind of merging, um, I do want to touch on the background, so, because, you know, you said about your background there in kind of studying philosophy, and then when we spoke before, you said very few people at Bailey Gifford have financial backgrounds. Why is that, and what do you think are the benefits of this mindset coming into investing?

A The belief that we have is that there are some basic tools that you need to do investing and what seven accounts look like, how to do some sort of fairly basic valuation techniques. And we can teach those pretty quickly when people join. And then there's a whole lot of stuff that you can only learn through experience and doing the job. But what you can't teach is cognitive diversity. And so the reason we hire from a range of academic backgrounds is because we bring in people with lots of different perspectives. Perspectives on the world, Um, rather than hiring people who grew up dreaming of being fund managers where you might well end up with a fairly narrow, uh, perspectives on the world.

AI assessment note: “the reason we hire from a range of academic backgrounds is because we bring in”

Q with you there. I want to touch on a couple of things that you mentioned before. You mentioned kind of fundamentals and, you know, first principles thinking. You mentioned market size. I'm always troubled by this. Should one do outcome scenario planning, thinking about how big this could be, knowing that actually, in your winners, you always underestimate how big it could be. So, is it worth doing at all?

A I think it's worth doing within the context of probabilities. And this is how we think about valuation upside. We create scenarios in which we are deliberately contrived where a company can be a very high returning business and a high returning investment for our clients. We think about the probabilities or the, the things that would have to come to pass for that to be the case. And then we look and test the probabilities that you would have to ascribe to that. But whenever you do that, there are many different things that go into it. It's the size of the market, but it's, It's the financial characteristics of the company, it's the robustness of the competitive advantage, which will be a direct input into the returns the business can make, the amount of capital it will require, the returns on equity it can make. Um, and so I think it's trying to understand these things holistically and in the round, imagining that you will be an owner of this company for a really, really long time, rather than saying, well, this thing will go public and, you know, somebody will pay a multiple of X, Y, Z, which is higher than the multiple that I paid, and that's how I'll make money.

AI assessment note: “I think it's worth doing within the context of probabilities.”

Q much concentration? I remember, like, Brian Singerman from Founders Fund said, um, the biggest enemy of great venture returns is capital concentration limits on a per company basis, and that Founders Fund actually have done so well because they have exceeded 40, 50% on a per company basis. Does it look like two or three having 70% of the capital? How does that spread in terms of capital distributions look?

A Um, so it's not quite that concentrated. Um, you know, I think at times we've had sort of upwards of sort of 50% of, uh, any given fund in the top 10 companies. Um, now those will often be companies that we've invested in privately that have gone public and, you know, have gone up a lot. Now, of course, some of that concentration has flattened off, uh, in the last few months as you would expect. Um, and so that kind of level of concentration, you know, can be a bit movable given that we continue to own these companies. Into the public markets and those, you know, the market prices of those businesses, uh, in recent times in particular can be rather volatile.

AI assessment note: “so it's not quite that concentrated. Um, you know, I think at times”

Q Okay. So I'm a precocious young member on your team. Who's just joined. Uh, and I say, Peter, Does that mean that, um, we're not taking enough risk? 10 years, one bankruptcy. Are we really taking enough risk going after Alpha if we've got one bankruptcy? I know, I know they're revenue generating, but really?

A I think that's a completely fair question, and we ask ourselves that all the time. Um, I think ultimately it sort of comes down to looking at the companies that we, that we have backed, and are those companies growing, uh, Uh, in the way that we would have hoped and growing very, very quickly. And they are, you know, we, um, I think that if we had a sort of stagnant portfolio of companies that were, you know, chugging away at, you know, 10% year over year, then we would be really worried. Um, but, you know, we're fortunate to have found companies that, uh, are able to grow very, very quickly, um, often over quite long periods of time.

AI assessment note: “comes down to looking at the companies... are those companies growing... very, very quickly”

Q Speaking of kind of seeing that value, that 10, 20, 30 x from here, I'm fascinated, given that as an entry point, how did the crossover funds invading growth, how did that impact your investing, your price discipline, your entry point, how did it change what you do?

A I mean, I think the way it really changed things, particularly last year, was it changed the time frames that rounds were happening in. So we were seeing rounds happening last year at speeds that certainly wouldn't have enabled us to do our necessarily diligence. I don't think it was enabling anybody to do Any diligence. And so we were walking away from rounds that companies we thought were really interesting, but where that kind of pace of capital last year, we just didn't think was enabling enough work to be done. I think the, the sad thing about that is the, the people that will suffer from that is, is the companies themselves, because they will have ended up with shareholders who don't fully understand what it is they've invested in. And that's kind of fine when everything's going great. But it's in difficult times, difficult times like we are in today, where I think that will end up being difficult for the companies who have shareholders who haven't really understood what it is they've invested in.

AI assessment note: “we were walking away from rounds that companies we thought were really interesting”

Q down, before we do a quick fight, I want to double down on actually your style of investing itself. People change a lot as investors over the years. You know, you've been with Bailey Gifford now for 12 years. When you think about how your style has changed, what have been the most significant developments? And are there moments or events that have caused these, like, developments? Let's be reflective.

A Yeah, I think that's a very interesting question. Um, I suppose that there's quite a narrow way to look at it, which is I started off my career looking at, um, public companies, and then I started looking at private companies. But fundamentally, I think what I've always been doing is looking at a great growth businesses. Um, I guess in a way, the sort of more recent iteration or development is that It's no longer just about the companies that I research and the companies that, that I find. It's about, you know, being an investor now is really also actually about building a team that's able to invest. And I think that's a whole new skill set that, you know, I've had to learn over the course of the last five or six years because it is a different skill set. Um, but ultimately we can only be exceptional as a group of investors if it's more than just one person that's exceptional. You have to be able to, uh, build a team Uh, that is comprised of great investors where you have a safe environment where people can learn, develop, be vulnerable, make mistakes. Um, and I very much think of, you know, the last five years of sort of building the private companies team within Bailey Gifford is actually quite an important part of my own growth as an investor.

AI assessment note: “being an investor now is really also actually about building a team”

Q And how does that change when you're making reinvestments? It's a different process and psyche. How does that change?

A So when we're making reinvestments, we revisit the investment case. We do an updated TenQ. Uh, we re-examine that five times upside case. And I guess you then have like, broadly speaking, there are three different decisions that you need to see five X on the reinvestment. Um, well, so this is where it slightly varies, right? So if you're going to double down on a company, then absolutely. Yeah. You need to see a five X on a reinvestment. Um, if you're going to do a small pro rata check, I think then you're doing pro rata checks. If they're relatively small can just be part and parcel of being a good investor, which will do can provide that things are going in the right direction. And then of course there's the decision not to do anything. Um, Where we sort of decide not to take part in a round, where we are not seeing, either we're not seeing the execution that we need, or we think the valuation just doesn't make sense.

AI assessment note: “So when we're making reinvestments, we revisit the investment case. We do an updated TenQ.”

Q you'll see more and more move to defense, to hard tech, to, to really challenging technical problems. I worry that this generation of investors, and potentially me included, is almost out of date. In this new world of very challenging technical problems. No longer is it, you know, as we said, triple, triple, double, double enterprise investing. Have the heuristics changed on what it takes to be a venture investor?

A So I've never thought of, uh, myself as, um, as an expert or an investor in technology. Um, I invest in companies. I invest in businesses. Um, and those businesses will often use technology to create these incredible business models that are very scalable and can be sort of high returning. Um, but, um, I'm, I'm not a student of technology. I'm a student of businesses and business models. Now, There, there are people on my team who are much more interested in technology itself, and also love investing, love businesses, but my, my, my focus, and I think this is a focus that perhaps makes me, uh, better at, say, growth stage investing than I would be at venture stage investing, is, is, is trying to understand great businesses, not great technologies.

AI assessment note: “my focus... is trying to understand great businesses, not great technologies.”

Q hate for this, but Brazil has not shown pathways to liquidity at scale. They've shown new bank and everyone says new bank. It's one in 20 years. There's D local and bunny. They're not a tool at scale. India has continuously actually been the Europe of this technology ecosystem. And now's the time. Now's the time. We're still waiting. How did you guys think about that? Like, Macro market risk.

A Yeah. Look, so I think that when it would be naive to say there isn't more macro market risk, but you then need to make sure that you're being, you're paying a price that rewards you for taking that risk. And in a sense, that is our job as investors. It's, it's to price risk appropriately. And as growth investors, we're trying to price the risk and uncertainty around companies becoming many times their current size. On the, the sort of path to exit and path to liquidity, I think this is where Having a very long-term time horizon, like, we are willing to take a little bit more risk there, again, just provided we are being paid to take that risk.

AI assessment note: “in a sense, that is our job as investors. It's, it's to price risk appropriately.”

Q How do you think about duration? Your structure means that technically, oh, you know, open-ended, we don't need to think about it, but there's always the opportunity cost of cash. It can always compound better somewhere else. How do you think about duration and the willingness to wait for that?

A Yeah. So, um, it, it slightly depends what funds, fund you're talking about. We have some funds where we're able to recycle capital. Um, and so within those funds, we are able to trim from companies that have gone public that we first owned privately and recycle that capital into new, uh, private businesses. And we do that when we think that there is greater upside to be made in whatever the new company is that we're investing in from continuing to, um, own that additional capital in that, that public company. In other more traditional fund structures that we manage, Uh, you know, they are more sort of traditional limited life fund vehicles. We can do a little bit of recycling. Um, but there, I think the, the important thing is just about always keeping your bar high and being patient. So the last fund that we raised, we, we, we did a, we closed it in 20, 21. We deployed very little in 20, 22 and 20, 23, because valuations were still too high. There were all kinds of games being played with, uh, convertible notes and everybody sort of Pretending that companies were still worth what they were in twenty-twenty-one. So we deployed very little in twenty-twenty-two and twenty-twenty-three, and it was really only as we got into last year that we started finding great businesses, but at great prices, and some of the games around valuation and structure starting to diminish a bit, and …

AI assessment note: “the important thing is just about always keeping your bar high and being patient.”

Q What did it change in your world view?

A There, there, when you become a parent, there is the sort of little being that starts off very, very small, and very quickly they become much, much larger, um, that you care about more than anything you can possibly imagine caring about, and that you are deeply responsible for in a way that, like, it's difficult to comprehend being as responsible for anything else as it is to be as responsible for your children. Well, in my case, child, I just have the one. Um, and it's, uh, it's amazing, but it's, uh, it's, um, every, everything, the, the, the, the good things become, like, way better than, like, the good things before you have a kid, and the difficult things become way more difficult and way harder as well, so it's like everything in life just becomes somewhat accentuated.

AI assessment note: “everything in life just becomes somewhat accentuated”

Q Okay. So I'm a precocious young member on your team. Who's just joined. Uh, and I say, Peter, Does that mean that, um, we're not taking enough risk? 10 years, one bankruptcy. Are we really taking enough risk going after Alpha if we've got one bankruptcy? I know, I know they're revenue generating, but really?

A I think that's a completely fair question, and we ask ourselves that all the time. Um, I think ultimately it sort of comes down to looking at the companies that we, that we have backed, and are those companies growing, uh, Uh, in the way that we would have hoped and growing very, very quickly. And they are, you know, we, um, I think that if we had a sort of stagnant portfolio of companies that were, you know, chugging away at, you know, 10% year over year, then we would be really worried. Um, but, you know, we're fortunate to have found companies that, uh, are able to grow very, very quickly, um, often over quite long periods of time.

AI assessment note: “if we had a sort of stagnant portfolio of companies... then we would be really worried”

Q Do you ever want to do public markets? Well, I did public markets, but like, again, like go back.

A I mean, we, we continue to own a number of our companies after they go public, right? So we're still big, you know, shareholders in Affirm and, uh, and Wise. Would I ever want to go back to just doing public markets? Um, Um, Look, I mean, I, I am so lucky and privileged in what I get to do, and I think that the reason I love doing what I do is because you get to expand the map, or at least expand the map for an organization like Bailey Gifford. Of course we're not doing like Series A and Series B, but when we're looking at companies within the private companies team, this will be the first time Bailey Gifford as an organization will have looked at these companies. Um, and so you're starting with a blank sheet of paper and you get to, uh, Discover these companies, and you get to, you get to know these companies as, as, as people in a much more personal way than, by and large, you can in the public markets, and I think that's very special.

AI assessment note: “in a much more personal way than, by and large, you can in the public markets”

Q head, you're thinking, are you serious? Do you know what I've got on my plate? And actually, you have to go, Peter, I'll be back in an hour, Really important that we have that chat that you wanted to have. Let me just deal with this. I've learned to not pass over my attention onto them in any way. Um, those are lessons for me. What are lessons for you?

A Um, I think that point around sort of giving people oxygen is a really important one. Um, I, I think, however, that's something that we've always I think that's kind of wrought through our organization at Bailey Gifford though. So, you know, if you come up within a culture that enables and facilitates freedom to look at whatever it is that interests you from quite an early stage, it's kind of relatively straightforward to kind of pass that on, um, within, within, within the team. Um, yeah, the, the question of, um, Of I think sort of how you can facilitate and kind of build, I suppose in a way it's about sort of building resilience within a team and sort of when you have those difficult times, you're making sure that it's not something which kind of leads to a kind of internal stress within the team. I think just comes back to having really good communications within teams, having people that are friends as much as peers and colleagues. And again, I think this kind of partly comes back to the way in which we've been built over a very long time as an organization, which is the fact that If I look around this office, um, I've worked with pretty much all of these people my entire career. Um, I've worked with them for a decade or more. And so, I think that just gives rise to a kind of level of trust and a level of working together that we couldn't have if this was a sort of organiz…

AI assessment note: “I think that's kind of wrought through our organization at Bailey Gifford though.”