The Prof G Pod with Scott Galloway

Prof G Markets: Inflation’s Descent, Sam Altman’s SPAC, and Private Equity’s Latest Target

Mon Jul 17 2023

Hollywood strikeCorporate dealsTech industryAntitrustInflationInterest ratesNuclear energySPACsPrivate equitySmall businessesValue creationCapitalismTaxation

Description

The episode covers a wide range of topics including the Hollywood strike, corporate deals, tech industry concerns, antitrust issues, inflation, interest rates, nuclear energy, SPACs, private equity, small businesses, value creation, capitalism, and taxation.

Insights

Concerns about income inequality and concentrated power

There is concern about income inequality and concentrated power corrupting individuals.

Tech industry monopolistic tendencies

Amazon, Apple, Meta (formerly Facebook), and Alphabet (Google) have monopolistic tendencies.

Inflation and interest rate management

Jerome Powell implemented unprecedented and painful interest rate increases to control inflation.

Renewed interest in nuclear energy

Altman's SPAC targets Oclo, a nuclear fission startup, reflecting the renewed interest in nuclear energy as a clean alternative to fossil fuels.

Challenges and potential comeback of SPACs

SPAC issuance has declined significantly, raising questions about the potential comeback of the market.

Private equity targeting small businesses

Private equity firms are increasingly targeting small businesses like mom and pop shops.

Value creation through private equity

Private equity firms provide value-added services to small businesses, optimizing operations and creating synergy across multiple industries.

Debunking negative perceptions of private equity

The notion that private equity firms are negative in terms of value-add is mostly untrue. Many entrepreneurs view them as partners rather than vampires.

Taxation and criticism of private equity

Private equity firms pay lower taxes on their earnings compared to other professions, leading to criticism and calls for tax reform.

Tesla's market backlash

Tesla was predicted to face market backlash due to CEO controversies.

Chapters

Hollywood Strike and Corporate Deals
Tech Industry, Antitrust, and Inflation
Inflation, Interest Rates, and Nuclear Energy
Sam Altman's SPAC and Private Equity
Private Equity and Small Businesses
Private Equity and Value Creation
Private Equity, Capitalism, and Taxation

Summary

Transcript

Hollywood Strike and Corporate Deals

00:01 - 06:59

150,000 TV and movie actors are on strike, marking Hollywood's first industry-wide shutdown in over 60 years.
A federal judge denied the FTC's attempt to block Microsoft's $70 billion purchase of Activision Blizzard.
Disney extended its contract with CEO Bob Iger for another two years through 2026.
Elon Musk launched an artificial intelligence company called XAI with the goal of understanding the true nature of the universe.
Musk believes existing AI is too woke and wants to grow AI in a good way to be maximally curious and truth-seeking.
There is concern about income inequality and concentrated power corrupting individuals.

Tech Industry, Antitrust, and Inflation

06:47 - 14:01

Capital gains is much less than current income, benefiting rich people.
Power corrupts and having extreme wealth can become a bad thing.
Disney's CEO, Bob Iger, made mistakes and should have focused on personal enjoyment instead of work.
Selling broadcast assets is challenging in the current business environment.
Antitrust law favors unbridled market forces and capitalism.
The appointment of Lina Khan as a young academic in a position of power at the agency is inspiring but needs to result in wins for the agency to be effective.
The tech recession signaled that tech companies are not as safe and secure as previously thought.
Monopoly power in tech is still a concern despite market forces punishing some firms.
Amazon, Apple, Meta (formerly Facebook), and Alphabet (Google) have monopolistic tendencies.
Elon Musk's Twitter activity has negatively impacted his reputation and caused polarization around him.
Startups without massive user bases struggle to compete with monopolies like Meta (Facebook).
LinkedIn ads offer targeted reach to B2B marketers with access to decision makers on the platform.
US inflation fell to 3% in June, a significant slowdown from previous months but still above the Fed's target rate of 2%.

Inflation, Interest Rates, and Nuclear Energy

13:40 - 20:12

Inflation has not yet reached the Fed's target rate of 2%.
Core inflation, excluding food and energy costs, is up 4.8% from a year ago.
The Fed paused rate hikes in June but plans further increases before the end of the year.
Chairman Powell has been praised for his leadership in managing inflation.
Increased interest rates have resulted from pressure on the Fed due to concerns about inflation.
Jerome Powell implemented unprecedented and painful interest rate increases to control inflation.
Factors such as supply chain improvements and AI may contribute to deflationary forces.
The US has achieved low inflation while maintaining historically low unemployment rates.
Doomerist predictions of hyperinflation have been proven wrong.
Trusting experts in the US government is usually a sensible bet during periods of instability.
Inflation is expected to decline as rapidly as it increased, which is positive for the export economy.
Government can make mistakes, but generally, government officials are talented and hardworking individuals.

Sam Altman's SPAC and Private Equity

19:55 - 26:56

Sam Altman plans to take a nuclear reactor company public via SPAC
SPACs are Special Purpose Acquisition Companies that list shell companies on the public exchange with the intention of acquiring private companies later
SPAC issuance has declined by 96% from Q1 2021 to now
The target company for Altman's SPAC is Oclo, a nuclear fission startup
Altman invested in Oclo in 2015 and the SPAC is expected to raise $500 million at an $850 million valuation
The decline of SPACs raises questions about whether this move indicates a potential comeback for the market
There are positive forces supporting Altman's SPAC, including his strong brand equity and the renewed interest in nuclear energy as a clean alternative to fossil fuels
On the negative side, Oclo is either pre-revenue or has very small revenues, and SPACs have a poor brand reputation in the financial services sector
The outcome of this battle between positive and negative forces will be revealed on the day of offering and within the following month
If Altman's SPAC holds its value or increases, it could indicate that animal spirits are back and people are willing to invest in SPACs again
Altman could potentially raise money from VCs in the private market but chose to go for a SPAC, which may suggest that he believes retail investors will overpay for shares at a higher valuation than VCs would offer
Taking a company public provides liquidity and capital raising opportunities, but Altman may be targeting broader investor pools and greater regulatory scrutiny by going public through a SPAC rather than private funding rounds
Investment banks have no IPO volume currently, so if Altman's SPAC had a viable business model, banks like Goldman and Morgan would be interested
Goldman is taking Audity Public, an AI-meets-beauty company, as an example of leveraging AI for consumer products
Altman's decision to go for a SPAC instead of private funding may reflect the current state of the venture market

Private Equity and Small Businesses

26:41 - 33:49

AI sets can provide desired makeup even if not going on TV
Amakyaaj is an Israeli company going public with the help of Goldman Sachs and Morgan Stanley
Sam couldn't get private market funding for $500 million without giving up more of the company
Goldman or Morgan Stanley not taking Sam's SPAC public is a negative indicator
SPACs allow companies to go public quickly and easily
Investors in SPACs have the option to participate or get their money back before acquisition announcement
Sam's SPAC was running out of time, so he found a target and will put $500 million into it
Market reaction to Sam's SPAC will be interesting as some investors may buy without looking at the numbers
Private equity firms are increasingly targeting small businesses like mom and pop shops
Small companies accounted for over 61% of all US private equity deals in Q1 of 2023

Private Equity and Value Creation

33:21 - 40:03

Small companies accounted for over 61% of all US private equity deals in Q1 2023, up from 50% in 2009.
Private equity is interested in smaller regional businesses because big private companies have been bid up to high levels and are less accessible.
PE firms provide value-added services to small businesses, such as optimizing operations, technology, and negotiating with suppliers.
Rolling up small dental practices allows access to public markets and creates a more valuable asset.
Private equity firms aim to centralize operations and create synergy across multiple industries.
This strategy benefits dentists by providing liquidity, increasing the value of their practice, and offering operational help and business advice.
The notion that private equity firms are negative in terms of value-add is mostly untrue. Many entrepreneurs who sold to PE firms view them as partners rather than vampires.
The idea that PE firms load distressed companies with debt and then declare bankruptcy is not true. If they default on debt, they won't be able to raise more money.

Private Equity, Capitalism, and Taxation

39:34 - 45:07

Entrepreneurs in private equity firms de-risk and take money off the table while still keeping a big interest in the company.
Private equity firms aim to grow or cut costs in a company, then take it public or sell it for more money.
Capitalism involves applying capital to its greatest use, which may result in lower employment.
Private equity firms pay lower taxes on their earnings compared to other professions.
There are issues with the tax structure and loopholes that benefit the wealthy.
Senator Warren is criticized for not raising taxes on the wealthy and demonizing private equity and billionaires.
Tesla was predicted to be overvalued and face market backlash due to CEO controversies.