The Pomp Podcast - #264: Dan Primack on How Covid-19 will Impact the Early-Stage Investment Climate

Episode Date: April 8, 2020

Dan Primack is the business editor at Axios and author of the daily Axios Pro Rata newsletter and podcast, where he covers the world of dealmakers across VC, PE and M&A. In this conversation, Anthony and Dan discuss the current economic crisis, the approved stimulus package, how small businesses are affected, the current impact on private equity and venture capital companies, and what limited partners are saying. =============================== Crypto.com is the only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users currently using the Crypto.com app. Download and earn $50 USD using my code ‘pomp2020’, or use the link http://platinum.crypto.com/r/pomp2020 when you sign up for one of their metal cards today. =============================== Ledger hardware wallets empower you to optimally secure, own and control your crypto. Visit ledger.com and give yourself peace of mind by knowing that your cryptocurrencies are safe. ===============================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to The Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Dan Primack is the business editor at Axios and author of the daily Axios Pro Rata newsletter and podcast, where he covers the world of dealmakers across VC, PE, and M&A. In this conversation, we discuss the current economic crisis, the approved stimulus package, how small businesses are affected, the current impact on private equity and venture capital companies, and what limited partners are saying. I really enjoyed this conversation with Dan, and I learned a lot. Before we get into the episode, though, I want to quickly talk about

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Firms are often left with a difficult decision, having to choose between security or liquidity. At Ledger, we're obsessed that our clients' businesses succeed. That is why we decided to create a digital asset platform that would enable financial institutions and crypto firms to manage their funds without compromising on security and liquidity. Firms like Uphold, Bitstamp, Crypto.com, Indax and Dunamu are already using Ledger Vault to operate their business at scale

while maintaining the highest standards of security to protect their clients' funds. Visit ledger.com slash vault to learn more. Control, scalability, agility, because security is not enough. but only as an expression of his opinion this podcast is for informational purposes only all right guys bang bang i have the one and only dan premack here uh tons to uh go over thanks for jumping on and doing this thanks for having me uh let's start first just your background and kind of what you're doing at axios now and then we'll get into the fun stuff sure i think my title at axios is business editor although it's probably a misnomer that's kind of when i joined they asked

me what my title should be and i made that up there was like six of us at the time so it's still there uh basically i sort of do a couple things i write a daily newsletter called the pro rata newsletter um which you can get at signup.axios.com which covers venture capital and private equity and mergers acquisitions etc i do a daily podcast also the pro rata podcast which is a little bit more generalist kind of the intersection of politics and business awesome those are the main jobs what would you do before axios i was a fortune for about six dish years i want to say uh both doing a newsletter there and also as a columnist in the magazine and then thompson and Reuters before that, about a decade or so. Got it. And based out of Boston, right?

Based out of Boston, about 20 miles west of Boston. We have trees. As we were talking before the podcast, I got a Yankees hat on, he's got a Celtics hat on, but nobody's doing shit. So it's all good. All right, let's dig into the stimulus. So basically, there's a financial crisis happening. There's tons of debate on how bad it is, but obviously big enough for the stimulus package to get approved and ultimately get kind of doled out here uh maybe just walk us through like what actually is in the stimulus both for corporations and small businesses sure uh so there's a ton in the stimulus as you might imagine it's a two trillion dollar uh package and just for some context i think i'm speaking out of school here

a little tarp which was the thing that came after the financial crisis in 09 at least the initial piece of tarp was i think like 750 billion dollars so this is more than twice what that was that took like a month put together it failed a few times in congress this took about a week uh so and we're already talking about another one so just to give context for the scope uh so there's a couple main things here uh the one most people have probably heard of is the checks that you me and everybody else in theory will get uh these checks they could be you know up to twelve hundred dollars per family or per person depends on on on your personal income etc but there's basically going to be checks that are mailed to every american taxpayer even more if

you have kids um there's that sitting in there that's a big piece of this uh there is kind of of what they would call unemployment on steroids. So usually when you get unemployment insurance, if you lose your job, you get a percentage of what you were making before. This will get people much closer to par, in some cases to par, in some cases for very low income people above par,

what they were making before they got laid off. Then on the corporate side, there's a few things. There's some industry specific bailouts, particularly for travel, hospitality, airlines, et cetera. There is a big corporate loan package, which has not been defined yet. We're kind of waiting for, We're still waiting for guidance from Treasury about what that's going to be.

And then there's a thing I think we're mostly going to talk about today, which is the small business loan program, which is about $350 billion. They're called PPP loans or payroll protection program loans. And the basic idea is these are for companies that have fewer than 500 employees. The loans can be for up to $10 million, and they base it on a percentage of your payroll. And for what it's worth, you do the calculation on your payroll, but anyone who makes over hundred thousand dollars their first hundred thousand dollars is all that counts so when you're doing the math you know if you have an employee that makes half a million bucks as far

as the government's concerned they make a hundred thousand dollars for that calculation and again and the point of this is to keep people on the payroll the the proceeds are supposed to go towards again keeping employees on and also things like paying the rent utilities etc they are technically forgivable loans which means you don't necessarily have to pay them back uh and they're getting issued through private banks. So you don't apply to the government for it, you apply to a bank for it. And then the bank is basically being backstopped by the federal government, originally treasury and SBA, but as just announced today, it now looks like the Federal Reserve is going to be backstopped. Got it. And so let's first talk about kind of who's the intended target of this,

because I think that'll lead into the further discussion around venture capital and private equity companies. But my understanding is this is mainly like most people would think of as like a main street business with 500 employees or less? Is that accurate? I think that's who it's mainly aimed at. Again, I mean, this is why we'll get into it. The goal is to keep people employed. I mean, that's the main goal of this is keep people employed, which is why there is another kind of $500 billion set aside for larger companies, 500 people plus. But yeah, this is for 500 and under. So yeah, a lot of mom and pops, but 500 employees is a lot, right? There's no mom and pop with 450 people sitting at it. So it's a little wider range. But I think when you look at the averages

that came out after the first or second day of the program, yeah, you weren't talking about those maximum $10 million loans very often. They were mostly smaller transactions. Yeah. And then the process for getting the loans, I think, has kind of come under scrutiny, mainly because, again, to your point, this has been very rushed, both because it needs to be, but also just the way that it was put together. And right now, if I'm a small business owner, I go to a bank, I actually apply. On day one, at least, there were some banks who said, we're not going to participate for various reasons. There were some banks who said, we'll participate, but only for a certain subset of clients. And then some banks who said, anyone and everyone, come on in and we'll help

you out. What's that look like? And kind of what's driving? It's really, really messy. And in part, because the program that was announced was going to start last Friday. Treasury Secretary Mnuchin said, starting Friday morning, this program is going to be open. Well, not every bank was ready to go on friday morning a lot of the in part and it wasn't just the banks it's not because the banks weren't well organized the guidance from treasury didn't come out until thursday night so you're saying to banks you're about to originate possibly tens of thousands of loans tomorrow and at about 8 30 p.m the night before we'll give you what all the rules are and by the way remember these banks like you and me and so many others most of their bankers are working

from home also so they've got the added you know difficulties and just think of any time you've gotten a loan, business loan, a mortgage, a car loan. Think of all the hoops and all the paperwork you've gone through. And now you're asking these banks to process thousands of these, you know, very, very quickly. So it was complicated. Bank of America was a good example. So they were kind of the first big bank to really come online with this on Friday morning. But they announced that you had to have two things. You had to have an existing business account with them. And then you had to either have also gotten a loan from them at some point or had a corporate credit card with that. If you didn't satisfy both of those things, you were out of luck. Wells Fargo said,

you have to be an existing customer. And then two days later said, you have to be an existing customer and have fewer than 50 employees. And what this ultimately did was if you were somebody who wanted a PPP loan, if you were legitimately a restaurant, hardware store, whatever, who legitimately deserved one, it almost started to feel like if you picked the wrong bank five years ago, when you opened your business, you were screwed. And what a random, you know, luck of draw things yeah so i think a lot of people have heard this and like the conspiracy theorists immediately run to like oh the banks are screwing this right i actually think it's probably more about risk management on the bank side any insight into like why bank of america says hey you have to

have the business account plus a credit card or taken a loan before which they started which they started to back off of a little bit when they got prison yeah look part of it as you say is risk management part of it is also processing right if you're an existing customer whether it's b of a or chase or anybody else they technically do know more about you on day one, right? They just do. They have got a lot of your records on hand so they can process those quicker. And because there was going to be such a rush here, there is a business argument to be made. If you know you're going to get flooded with these things, the thing you really don't want to do is start taking on new clients and have your existing clients left out.

They're your clients. You can't do that. Yeah. And so I guess let's just kind of assume that the processing component is going to get solved, right? The banks will get online because some of this is also technical, right? They got to set up a website. They got to take intake. Where do you store that database? How do you make sure that it's secure? All that kind of stuff's got to get set up. But once we get past that, then this brings into question, okay, who's it intended for and who also should be available? And this is where you and I sort of go back and forth on Twitter of mainstream business, small business, 500 employees or less, pretty understandable. And I could show you five businesses and someone could pick those three match, those two don't, right? That's pretty

clear but then you get into what about venture businesses right so venture capital backed businesses that have 500 employees or less are those part of this private equity then step up and says well wait hold on a second like what about our companies you kind of spread out from like that core demographic um or target help me understand like where does that lay from my well where it lays right now is complicated uh so private equity is private equity backed companies so long as when we think of private equity in this context we're talking about private equity owned right so the private equity firm controls the company has 51 or more of the voting stock say uh they're out of this they're they're they're they they are out of luck they know they're out

of luck the venture-backed ones are more complicated and again we're talking about venture-backed companies that you know you know firm a has 10 firm b has 10 something like that uh the problem here is something called the affiliation and what the affiliation rule says is if i am it anthony if you and i both run venture-backed companies and we have the same VC firm, we might each only have 100 employees. But as far as the small business association is concerned, we're both controlled by a venture capital firm, how many employees do they indirectly have throughout their entire portfolio? So suddenly, my 50 or 100 person business and yours, actually, as far as the government's concerned, might have 3000 employees, and

suddenly we don't qualify, we don't have 500 or less for this program. There has been a push, a bipartisan push by Nancy Pelosi, Ro Khanna on the left, Kevin McCarthy on the right, to change this, at least for venture-backed startups. There were new rules that came out, I want to say on Friday night or Saturday night, that were supposed to address this. They didn't completely because they didn't seem to understand basically how venture capital stock charters work. For example, the fact that the somebody, and this is really in the weeds, but if I'm a Series B investor, I technically have veto rights maybe over a dividend or something like that. So McCarthy's people told me last night that they are trying to get additional

guidance so that venture-backed startups of under 500 employees can qualify for these and can legitimately and the and and what and the problem of course is it's the banks that would be the ones holding the ball so what they need to do they need to say to the banks don't worry about it the affiliation rules don't count because if i'm a banker i can't take a venture-backed company today and give them a ppp loan and then have the federal government come to me seven months later and say actually you shouldn't have given them that loan it's not guaranteed anymore the banks just can't do that they shouldn't do that it's too much risk particularly on a low interest rate for sure and then how does this fit in with the private equity folks like are the private equity owned businesses

is there talk about them getting uh access to either this 350 billion dollars of stimulus or maybe another package that comes for them or they kind of just add a lot it's interesting uh the ones that are 500 employees or more might be okay because there is this other there's this other pot of money this 500 billion dollars which by the way it might be where boeing and others get money from But they're calling this a midsize lending package. But again, we don't have details on that. But it is the private equity-backed companies that are smaller than 500. And it's interesting.

When we think private equity, we think, you know, KKR and Blackstone and TPG and these huge firms that buy brand-name companies that we've all heard. But there is an enormous amount of private equity, particularly in the Midwest, that buys small manufacturing companies, small industrial companies, et cetera, maybe with like 40, 50 employees. Those companies are out of luck in terms of this. Yeah. And I guess this really is kind of the thought process here of this isn't a bailout, right?

So you kind of put bailouts on one side. These are loans. You described earlier that they- Although forgivable loans. So that's what my question is going to be. Yeah. So my question was basically going to be like, on what terms do I not have to pay it back versus I would have to pay it back if I get actually some of the stimulus?

I think I don't want to speak and be too wrong on this. I think in general, so long as you meet the requirements in terms of maintenance of payroll. uh so i think it's like 90 and again don't look at this up don't trust me on this and then go apply for a loan but i think if you maintain something like 90 of your employee base then you then it is considered forgivable i think you have to be able to prove need but it's interesting when you look at the application documents uh and not bank specific ones the the recommendation from uh treasury and sba it's really really vague what you have to say it doesn't say you need this money to maintain operations which would be oh okay wait a minute to keep my 50 employees and then my what

no it just says to support operations well in theory any money to any business supports operations give 10 million dollars to goldman sachs that'll support operations of course it will now do they need it no but would it support operations so there's pretty big question you know that word uh support is doing a lot of work in that application and i think from a technical perspective. It opens up a lot of businesses that might not, you know, aren't going to go under without the money to justifiably say, you know what, our revenue went down a little bit. Maybe we weren't able to hire as fast or, you know, lost a customer or whatever, or worried about that in the future. We qualify. Yeah. Is that an intentional use of the word support, do you think? Or is that

just something kind of, hey, it was put together quickly and could have been clarified better? I think the purpose of this was to keep as many people on payroll as humanly possible, as fast as possible and so the the to me and now you and i might disagree about this but i so i think they wanted to cast as wide a net as they possibly could because i think as far as the federal government is concerned the difference between somebody who loses their job on main street or on sandhill road is largely irrelevant to them they need people to keep their jobs period yeah that makes sense and i guess part of this too then comes down to um if you go to the corporate to the bailout piece. There's this entire conversation around, is the bailout to save

the company or is it to save the job? And I think your take is actually what a lot of the stimulus is doing is it's trying to save jobs. It doesn't really care so much about the company. I don't want to say it's indifferent to the survival of the company. It's more so trying to save jobs. Is that generally? Well, this particular, the PPP, I mean, it's literally payroll protection program. I mean, it's explicitly about jobs. Absolutely. Yes. Got it. And so on the bailout side, part of what it seems like is you get these private equity investors who are saying, wait a minute, hold on. Our guys aren't available for this. Why don't we get it? And my position was, well, listen, you guys got tons of dry powder. You're sitting there. If you believe

in the company, put money in, right? And this extends all the way even to the corporates where whether it's United or Boeing or whoever, it's like, look, at some point there's a price where investors will put in debt or equity. Now, it may be a dislocation in, you know, what me as an investor or you as an investor believes the value of the company is versus what the executives believe it's worth. But at some point, there's a market. And it feels like people are just kind of running to the government. I wrote earlier this week about or last week about they're like the idiot in the room. They'll give the most favorable terms that you couldn't get from the private market. Do you agree with that? Disagree with that? Kind of how do you see that play out?

I agree with it. I think it actually reflects some of the worst of venture capital and private equity. But here's the way I look at it. If you're venture capital or private equity, and you've got a business that is actually struggling, maybe it's a retailer and they've had to shut stores or restaurant chain. They're looking at this right now and saying the most financially prudent thing for us to do is to lay people off. If we have a retailer and we've had close the stores it does us no good from a fiscal perspective just to keep the people on payroll now if we want to keep people on payroll we have a choice uh if we're going to do it and assuming again that we're not a wildly profitable company with you know billions of dollars or hundreds of

millions of dollars in the bank which few of these companies have um what and particularly if they're private equity back they probably got debt interest payments they do have to keep meeting the banks have not given anyone a break on that um so the private equity firm is going to say okay we're probably going to lay people off because we're not going to go to our investors the pension funds the endowments the you know the sovereign wealth funds or whatever and say yeah we're doing a call down we need 20 million dollars for company x and we're not doing it to grow the business we're just doing it to pay people who aren't actually working right now it's going to be a to be honest a you could actually get sued for that in theory but another piece of this is

remember their investors are struggling also in a lot of cases and having liquidity problems because they had a public market portfolio that's been slashed by 30 in the past three weeks so the last thing they and you wouldn't be talking about 20 million for 10 million for one portfolio company you might be saying to the your investor yeah we're going to do about 50 capital calls today uh with just an incredible amount um so their view and the way when i talk to them is we want the money from the government today to keep people on the payroll if we have to put money in at some point that's going to be to keep the actual entity afloat so that when all of this someday ends there will still be an entity in a building for them to return to i i am very understanding of

the argument they've got money they should invest i i definitely am understanding the argument some of these partners should be pulling money out of their own pockets i think that's definitely true we've seen in a few cases like leonard green a buyout firm in la um but again if the point of this is to keep people employed if you want to say you know what venture capital firms private equity firms you're behaving badly fine doesn't change the fact someone's going to lose yeah i think it's a really important distinction because you're basically drawing a line between what's everyone optimizing for it the government is optimizing for safe jobs the private equity investor is optimizing for return on investment and save the company right and actually those two things are

uh in some cases uh actually opposite of what you would do from an action perspective one you fire everyone the other you keep everyone um and so it's trying to understand how do you um you know basically get people to do the right thing and keeping the jobs uh which is against kind of the capitalistic view of save the company at all costs. It is. And look, I mean, there was a solution to this. And we'll see maybe on the bigger loan packages, we haven't seen the rules yet. A solution would have been, of course, taking some sort of equity in the companies. But with the PPP program, it is still pretty small. I mean, again, you know, if you're a 400 person private equity backed company, again, the maximum loan is 10 million bucks. If $10 million is the difference

between, you know, living and dying, that it's probably not the case. This is still for mostly for small businesses. And the federal government, I just, from a logistics standpoint, does not want equity in, you know, 80,000 small businesses across America. Yeah. And so I guess then that brings the question of like, is there concern around like, the extremists would say, hey, this is nationalizing large corporations, right? Whether it's United, Boeing, you know, those types of companies. But the other side would be, well, actually, the taxpayer should have all of the exposure to the benefit of their capital being used right so whether it's debt with warrants whatever kind of how does that playing out or

what investors saying there well like i i'm i'm partial to that i i think the government should get equity if you're giving billions of dollars to a big corporation that should damn well get the the upside shouldn't all be for the shareholders uh you know it's interesting boeing's ceo and god you know every day now it's like a lifetime in this world i want to say this like three weeks ago before the cares act was passed boeing ceo got asked about this he said oh if there are equity strings attached we're just not going to take in the money we have all these better options uh he never explained what any of the better options were we asked boeing repeatedly no one could quite answer that question because it seems if you had better options

you would take the better options like if i have a better option that's what i usually take why wouldn't i it's a better option um so like yeah look i think the government should the government had equity stakes uh you know through tarp uh it had equity stakes in the auto bailout in certain cases in gm and yeah it's an activist investor asked anybody at gm if the government was a passive or active investor it was an active investor it should have been it was a lot of money. It was a lot of taxpayer money. It ended up making people money back. You know, the federal government ultimately made money on the financial bailouts of 09 on the auto bailouts. So it's not a bad, yeah, but of course there should be equity for the big checks. Why shouldn't there be? It

shouldn't all be private shareholders who benefit. Yeah. And what happened to the equity in those cases? So like in GM's case or whatever, do they basically hold the equity until there's like debt paid back and then they sell the equity or how does that work? Yeah, they ultimately decide to sell it um you know every situation is different you know you what you really want is the underlying entity to be stable but yeah eventually they sell it and they sell it you know either on the open market theoretically you could sell back to the company hell in theory sell to a private equity firm but um yeah they eventually sold it and they were very public about it they did it in pieces etc but yeah once once the company is stable and there is a market for it again the government

sells it hopefully to profit yeah i guess really this then brings a question of like okay we get the first kind of wave of stimulus two trillion dollars i'm assuming that there's going to have to be more uh over time it's soon like i mean they're already Pelosi's already got to plan out the cares act too uh it's coming it's coming quickly because almost everybody agrees that what was in the first one wasn't enough money uh and because there's also all sorts of like in the first one there was you know there was hospital bailout money which is desperately needed

there is going to be more of that needed states and municipalities there was money for them there's going to have to be tons more of that think about if you're a municipality that makes most of your money off of sales and tourism taxes or not most but a huge amount of your money off sales tourism taxes your city's been shut down for three weeks but you're still paying your teachers your cops your firemen your sanitation workers and everybody the same amount what and and you have to balance your budget usually legally if you're a municipality or state and you have bonds that are due what are you going to do about that you're going to need a bailout and only one entity in america can print

money the the um the metric i saw or the article was uh talking about the mta how the mta basically saying like, look, nobody's riding the subway. It's down 90%, right? If we have 90% drop in ridership, how the hell are we going to pay the bonds? By the way, for airports as well. Airports as well. Oh, really? Okay. Yeah. Airports have bonds that built them and they collect that. When you get your airline ticket from JetBlue or United or whatever, part of what you're paying for is actually the operations at the airport. There's a fee in there. Those fees are obviously down 80%. Got it. And what are you hearing from like private equity investors, venture capitalists in terms of how does this change the landscape of just business investing

in general what i mean by that is uh you know there's obvious stuff hey people are gonna start asking is your company pandemic proof rather than recession proof types right but actually does this make people more gun shy or people getting you know kind of salivating and saying hey we're gonna get more aggressive here we think there's gonna be some cheap buys like what do you see from a strategy standpoint across different firms on the venture capital side on the early stage side i haven't seen all that much of change um you know obviously the the mechanics of doing things are different people aren't hopping on planes and hanging out at you know yc networking parties anymore. So the mechanics changed, but there's actually been a pretty decent amount of VC

activity in the last few weeks. Admittedly, not as much as there was before this, but a decent amount, particularly on the buyout side. So, you know, because if you're a pre-revenue company, you haven't necessarily been affected yet because you weren't selling anything to start with. A bunch of the later stage venture deals have blown up. There's no doubt about that overpricing because no one really knows what anything is worth now. And then on the buyouts have largely slowed down. There are some that are still getting done. New ones are pretty rare for two reasons. One is the pricing issue. What does this thing work? And then B, there's a debt issue. There's a question of whether you can issue new junk bonds or new high yield bonds, which is usually

what private equity deals get done with. There've been a lot of these junk bond funds raised in the last couple of weeks, but very little new issuance. Because remember, the banks have to issue it and then they usually syndicate it out and find other buyers and they are not at all convinced they can Yeah. And I guess really what ends up happening is if all of the over leverage in the private equity companies is just applying more pressure to them getting the relief they need. Because, you know, if you look at some of these retail restaurants or some of these you've made, I mean, we're talking revenue going to zero. It's not like, hey, it's down 30% just because people are going out a little less. Zero. Where do you get the money to pay, you know, two or three months of your debt payment? You know, these are huge issues because, you know, it's certain companies just happen to be managed very, very well and happen to have a massive rainy day fund or more likely were really lucky when they raised. Right. They raised money in January and thank God they raised money in January and weren't planning to do it in April. No, but it's an enormous problem. You know, in the financial crisis, the leverage, the private equity backed deals actually survived. Most of them survived. There were some big bankruptcies, but a lot of them survived because

what the banks said was, okay, look, almost none of you can make your debt payments. So we have a choice. Either we can assume the companies, which we don't really want to do because among other things, we don't have any internal way to manage company X or Y, or what we'll do is what they started calling amend and extend, which is, okay, your debt payment was due in April. It's now going to be due next April. We're going to add a point or half a point of interest onto it, but we're basically going to push you off. And in theory, you could do that again this time, except that this time you have debt payments from everybody do it once and everybody wants to extend municipalities want to every corporate does investment grade and junk bond individuals who

have home mortgages who have car payments the entire system there's so much pressure on it on the lender side they can't amend and extend everybody and if they did in theory if they did what you'd end up is that liquidity crunch that we were all freaked out about 2009 where banks just stopped lending in this case it would be justified because they have no money because no one's making the interest payments, which is then, you know, rolls back out. Yeah. What are you seeing? What are you seeing on the pension side with like the LPs, right? So you kind of, you got the companies and you get the investors and then you go all the way back out to the LPs. A lot of them are left, especially public pensions, holding kind of this corporate debt or kind of credit

issues. But what are you seeing on that? We're seeing something called the denominator effect, which we last saw in 2009. And what the denominator effect, basically, if you're a corporate pension or public pension, your allocation, say to venture capital is maybe 5%. 5%. And but that 5% number in terms of real dollars, it's 5% of the overall assets of the pension fund. So if the pension fund is doing really well in the stock market, that 5% means more actual dollars going to venture capital. If your stock market portfolio has gone to shit as it has now, suddenly, it's a lot less. And so you have a lot of pension funds that thought they were under allocated three months ago, or three weeks ago, who are now very over allocated. And what

I'm hearing from pensions and from endowments, particularly remember endowments also, because they don't have students physically in the dorms right now, and they've got their own financial issues, is that they are saying to investment firms, look, we can generally still make capital calls if you have them. But in terms of new fundraising, new fund commitments, you better be best of the best for us to be doing this. This is not the time to be raising a new fund. There have been a bunch of fund closings announced recently, but almost all of those were commitments that were baked in months or weeks ago. Yeah, the endowment game is always so funny to me, I tweeted the other day, I said, I think we're going to see a lot of exposure of

universities. Basically, they're asset management firms with just schools, right, for the tax benefit. But we'll see how many of them actually dip into the endowment. And, you know, part of the endowment's there to rainy day fund type stuff. And there's been a number of schools now that have laid off, really, I think they're laying off vendors, right, or kind of severing ties with vendors who then lay off the cafeteria staff or maintenance staff, etc. But you hope to see, again, going back to, are you optimizing for kind of your P&L at the school, or are you optimizing for saving jobs? If they want to save the jobs, then they can kind of dip into that. They also have huge question marks, right? Like a lot of these schools, they make a lot,

a lot of them, not all of them, a lot of them make a lot of money in the summer programs, which unlike during the regular year where so many people are on scholarship, those summer programs, people generally, not exclusively, are paying for them. And particularly people from other countries like China are coming in and paying for them. They're possibly facing none of that revenue and there are look there's still legitimate questions if they're opening the doors again in september and if they don't what exactly does that mean for them and by the way are they going to be opening the door for people from china to come in students i don't know yeah i don't think they know do you think this changes the way that people view kind of higher education like the

whole idea of i saw a couple tweets flying around like hey i'm paying fifty thousand dollars for my kid to sit at home on zoom right i mean look i i don't think anyone would argue that you get a better class experience in person if it's a decent school and there's certain things you can't do at home, right? If you're a biology major, a chemistry major, you can learn things. You can't do what you can do, and you can't have the same discussions. I mean, look, there is tele-learning. That's a thing. And just like we can work remotely, and a lot of people do, but there is an argument to be made that there is a difference still between a meeting in Zoom and a meeting face-to-face, that different things happen. You have conversations more organically or different

in a video conversation or on a phone call or in person. I think you just do. As a reporter, i can tell you if i sit down with someone for 30 minutes in a coffee shop i almost always get more out of that than 30 minutes on the phone or 30 minutes on a video conference you just do i think that'll come true in schools too plus as you and i both know you know as far as the students are concerned the experience of college of being there is a lot bigger than the classes yeah at least 50 percent is the social side of it at least 50 percent and then obviously uh silver lake they've made a bunch of big moves recently uh both the twitter deal and then they just announced about a billion dollars in equity in airbnb what um what are you seeing on that front uh so they're

interesting because they're about to launch fundraising with that whole thing i just said don't raise money uh they're going to apparently they're going to try to raise 16 billion dollars for their for their new general fund uh and they'll get it probably too uh silver lake is interesting because they've had some struggles uh wme which is william morris endeavor um which also happens to own ultimate fighting championship and professional bull riding interestingly uh was supposed to go public last year wasn't able to just had to lay off a bunch of people um just think of what they do they represent actors and people in the entertainment industry and there is no entertainment production right now at all you can't sign someone to a deal when there's

nothing to do um so they're having some struggles there but but silver lake's looking i think at airbnb is a pretty good opportunity um you know we don't yet know what the deal terms are on this but i'm sure they got a better deal than they could have five months ago and airbnb is obviously they say they've got enough cash but obviously as a company that could use some extra liquidity and some extra cushion given that their business is basically shut down yeah do you think that silver lake anything changes at twitter uh after they come in it's hard to say i mean because because there's a activist hedge fund uh elliot that's also in there and helping drive the ship they help bring silver lake into that you know it's interesting you know elliot and silver lake

both got into twitter before all hell broke loose so i i think like a lot of things uh ask me again in six or eight months hopefully when things are back to normal i think when i talk to investors on the private and the public side they all basically say that you know q1 and q2 of 2020 are are just written off you know performance good performance bad it's irrelevant we can take nothing from it in terms of how this company is going to perform long term maybe outside of you know an outlier like a zoom yeah for sure uh carnival cruise we just saw the the big stake? What's your take there? Oh, cruise companies. I mean, I don't have a particular take on it, except look, I'm not a cruise person. But like the

every time there is any sort of, you know, you almost know going on a cruise ship, you're gonna get sick with something. So if there's gonna be a pandemic, they're gonna get, you know, even more sick. It's a it's a disaster. I mean, this is the worst thing that could happen for a company like them. It's like amusement parks, or other tourist things, except, you know, when disney decided to close they didn't trap everybody inside the thunder mountain for three weeks like they let you leave uh it's awful uh look there is a business there people love cruises i i am curious though you know when you talk about how the economy will eventually come back and what will open what won't and you know you know you're where as you said the yankees at if the yankees

announced in three weeks you know what opening day we're gonna play a game how many people show up at yankee stadium that goes you know exponentially for a cruise flight yeah the the uh The thing I saw was the Saudis took an 8.2% stake in Carnival. And it's very interesting because you get almost the pricing conversation comes into play, right? It's like, has it bottomed? Has it not? You've got some people who've got a ton of capital sitting around the table, and are

they going to get excited early or are they actually timing it correctly? And that goes for the soft banks of the world, the Saudis, et cetera, kind of all around globally. I think everybody's having to make a guess on when all of this ends, right? Because in theory, if you and I are still stuck in our house in August, it's entirely possible to say that the Saudi state goes to nothing and the company goes bankrupt. Like, you know what, do a CARES Act too great? There are only so many federal bailouts. And so that's the bet, right?

The bet is really a timing bet on the virus, to me, as much as it is on the companies. And they're trying to time it out and say, OK, they might be able to start, you know, putting ships out again in, you know, make it up, August, July, September. They're making that calculation. I assume the Saudis are. But everyone's just guessing. Nobody has a clue. You're just making your best case scenario. You're seeing this in state government. Budgeting committees are saying, well, best case scenario, stores reopen on July 1st. Worst case scenario, they don't. Schools come back. Schools don't come back. Yeah. The ones that just caught my eye was, I think it's D.C. and Virginia both announced stay-at-home orders till June 10th is kind of the current guidance. And that's pretty far away. We're talking 70 plus days away or so. So it's pretty far away. But I mean, the thing that would be worse, you could argue, is if, and this is why Trump's whole, you know, we're going to reopen things by Easter, which is this weekend, this Sunday, which is just nuts to think that he was saying that a week ago, is, you know, the worst thing that would happen would be that everything would start reopening, people would go out, and then we'd all have to go back into lockdown, because the crisis of confidence from that would be extraordinary. One thing, though, is we still don't really have any sort of answers on how we're going to reopen because we haven't done the kind of contact tracing that is required, that was done in South

Korea, that was done in Taiwan. It's unclear how we're going to know when it is, quote, safe to go back to work. Like, you know, I haven't gotten sick yet. Maybe I have. Right. Maybe I was asymptomatic. But how is anyone going to know? How am I going to know that it is safe for me to not get other people sick by going into a store, going to my kid's school, any of that. We haven't done any of that stuff. You know, I don't know who I know or who I came into contact with who has tested positive.

We don't have enough testing to just test everybody, which would be the ideal thing to do. And then you could literally just quarantine X percentage of people for 14 days and be done with it. We don't have any of that in place yet. We are so far behind. I think June 10th is optimistic. Yeah, I don't think that June 10th,

everyone's going to just walk back out their door and go do what they were doing before, right? It's just a lot of people saying, hey, the world we're going back to is going to look different, right? Whatever that ends up being. But then that leads to the conversation of how many small businesses can actually survive till June 10th without revenue, right? It feels to me like we're talking double digit percentages of them that don't come back. Absolutely. The way I viewed it, I was driving through Boston the other night. And obviously, it's a weird city right now because it's very very dark you know so many it was like 8 p.m so it was dark out but so many restaurant storefronts and stuff were you know there were no lights on and it occurred to

me that when quote the world comes back I'm going to drive through those same neighborhoods and what I'm going to see is I'm going to see a bunch of lights that are on but then a weird number that are off instead of all being off almost like it's 2 a.m it's going to be 8 p.m and a bunch will be on but a ton are going to be off you're going to see just just yeah this weirdness it's almost like when you're in a city that's got like a bunch of abandoned buildings it's going to be a bunch of abandoned store lots yeah yeah in New York right now it's got to be 75 80 percent of storefronts are just off right they're just not operating at all uh and you know it's bad when they've literally boarded up like and I'm not talking about like the Saks Fifth Avenue type stuff

I'm talking about literally like the local bar has boarded up their doors and they just don't expect to come back for a while and and there's questions you know the commercial landlords in this many of whom are actually behaving pretty well I am giving people deferments on rent or even or even giving rent but they're paying they still have their mortgages to pay and and so you could also have buildings go bankrupt. You know, in theory, when things come back, it's entirely possible that landlords are going to say, you know, to potentially new tenants, the new pizza shop, we won't charge you rent for the first three months. You know, they're going to beg people to come in because they're going to have this problem as well. I think there's going to be a lot of

giveaways at the beginning, but somebody gets screwed in it. Somebody always does. Yeah. Do you think that if this lasts long enough, we do see kind of the full waterfall effect where you get the businesses, the investors are all, you know, kind of turned upside down. Then you do get the commercial real estate impact all the way out to the banks and even could see some liquidity issues with the banks that you were kind of alluding to earlier? I do. I wish I didn't. I see this as a really dark hole. I really do. I see it. And we're writing a little bit about this the next couple of days. As I said earlier, the municipal and local government side, you know, it's one thing for, quote, Detroit to go bankrupt or, you know, 40 years ago, New York to go

bankrupt. And you say, OK, this is a poorly managed city, a poorly managed county or town, or they had a you know an earthquake or something but we'll deal with that because the state can backstop and state's not going to let you know a town or city go under but no state has ever dealt with dozens of towns or cities and counties going under and they don't have the money to backstop them all and and what happens then uh do you have to lay off all the teachers like what's the backup plan for a school system what's the backup plan for police and fire departments or sanitation like this thing to me you know the the comparison to the financial crisis in the financial crisis we knew in retrospect, like after it started, we knew where the source of the problem was. We knew

where the original crack of the dam was. So the job was plug the hole in the dam and then go clean up all the water that has flooded everywhere. And that wasn't easy, but you knew you could find it all. In this case, to be honest, in this case, the dam has been blown up. There are so many cracks, you can't even see the concrete anymore. And I'm a bit apocalyptic about this. I don't quite see outside of a treatment real soon or a vaccine real soon so treatment more likely in vaccine best case scenario vaccine is early next year i i see this being it's not even a domino effect it's a bunch of kids playing monopoly and one gets pissed off and kicks over the table and the dog eats some of the houses in the hotels there's just nothing you know it's just all blown yeah

uh do you think that we'll see bailouts of the pension funds we might but again there comes the question of is the feds balance sheet truly limitless like okay they've bailed out small businesses they've bailed out large businesses they've already said they're bailing out hospitals and then they're doing some bailout to cities and towns like at what point do we stop and at what point does massive inflation begin um but are pension funds going to be bailouts absolutely public pension funds uh transportation pension funds all of that absolutely yeah yeah you uh you saw around the corner so if we see the massive uh bailouts all across the place at what point people question the currency and they just say look you know the the bread got more expensive

you know from last week to this week but you know i don't think we're quite there yet but this is the path to that world if we're going to go to that world right it is i mean you know the only saving grace potentially is in the financial crisis that people looked at it and said well it's possible the entire financial system is going to collapse and we don't know what under what what's under that and what happens in this case everyone knows that this will end which is different like that that the the source of this coronavirus is going to be might be next year but there will be a vaccine there will be a treatment that curves will bend all that stuff and so i mean you saw you know we're taping this uh what's today monday and the markets went up a lot today

that's the only saving grace is that if there are enough long-term investors who decide that they believe in these companies in this economy long term for silver lakes that believe in the Airbnb or Saudis who believe in carnival that can get us through this and on the pension fund side and that their public equity values just won't be absolutely demolished and there will be money they'll be able to sell stock that can then pay their pensioners or get dividends that will pay their pensioners. Yeah in some weird world it's almost like the private investors are bailing out the government by plugging some of those holes you talked about right so the government doesn't have to step in and print even more money to then go ahead and stop the holes themselves.

Absolutely and I mean look that's partially how the system is supposed to work in terms of this stuff. The problem is there are these holes that are not equity holes that are debt holes and those people can come and buy debt, but it doesn't work the same. Yeah. Last question for you. What's the one thing that you're paying attention to that either other people haven't noticed yet, or you think more people should be paying attention to either a cool story or just some kind of structural issue that you see that people aren't talking about? I think it's the future on the investment side, on the venture capital and the private equities side, reputation. What you're doing now that might not be viewed as in your best short-term fiduciary interest, but will it come

and pay you back in the end? You know, back in 2001, 2002, after the dot-com crash, you saw a lot of venture capital firms decided, granted, sometimes their limited partners had to push them to do this, but they cut the size of their funds. So, you know, they would say it raised $500 million in 1999. And by 2001, they realized, wait a minute, we can't reasonably invest this anymore because valuations are now cut in half. Maybe the sorts of companies we're investing in don't exist anymore. So we have a choice. We can either continue to collect the fees off this every year and get rich, or we can say to our limited partners, you know, you committed $50 million. We're cutting the fund in half. You're only on the hook for 25. And if you look back

from that, for the most part, the funds that cut their fund sizes all still exist. And it's been 20 years. The ones that didn't, that were really egregious about it are almost all gone because they, they, they, I mean, you know, the limited partners were on the hook. They were contractually on the hook. They paid the money they had to pay. And these people now all live in good houses, but you know, people remember, people remember if you act well, or you act badly in a crisis, I think that's definitely going to be true for private equity firms as well. Ultimately, whether you're a startup or you're a company that's going to be taken over, you can choose who is taking you over and you can always just take the best price, or you can choose somebody

who you think is a good actor. And I, I do believe in karma and I believe good actors are going to be paid back in the end for the way they act during this, because this is an unprecedented time. And honestly, most venture capital firms, most private equity firms, the partners themselves, the management companies themselves, they have a lot of money. They can do a lot of this bailout work themselves, even though it hurts. Yeah. I think it's a great message of just, just be kind, man, just, just trying to do the right thing. And you may actually may not get it right but but i think people understand kind of the ethos and the intention behind a lot of this work even if people don't get it right exactly they still understand what somebody's

trying to accomplish absolutely agree yeah where can uh where can people go find you on uh on the internet on the interwebs yeah on the interwebs uh you can get the pro rata newsletter at signup dot axios.com uh pro axios pro rata podcast on itunes and spotify and all those fun things and then on twitter at dan primack that's dan p-r-i-m-a-c-k you're uh you're one of the most well-connected people in tech and finance. So I appreciate you coming on and sharing some of the insights. I think people enjoy this. Thanks for having me. Appreciate it. Hey, everyone. Pop here. If you like this episode of Off The Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate,

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