WHEN: Today, Wednesday, September 30th
WHERE: CNBC Institutional Investor Delivering Alpha Conference
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with H.E Yasir Al-Rumayyan, Public Investment Fund Governor and Aramco Chairman; Stephen Schwarzman, Blackstone Chairman, CEO and Co-Founder; and Robert Smith, Vista Equity Partners Chairman and Chief Executive Officer, live from the CNBC Institutional Investor Delivering Alpha Conference on Wednesday, September 30th.
Mandatory credit: CNBC Institutional Investor Delivering Alpha Conference.
Realtime Transcription by www.RealtimeTranscription.com
DAVID FABER: Thank you. And thank you to all of our participants. We are looking forward to a very interesting discussion over the next 30 or so minutes. Let’s get right to it. Yasir, I want to start with you, and some investments you made opportunistically in the United States market, in U.S. equities, during sort of the bottom, really, caused by the pandemic. Let’s talk, I guess, late March, early April. Tell us, A, whether you hold any of those still or whether you’ve actually sold them. And then fast-forward to where we are right now and give me your sense as to the U.S. equity market. Given you obviously saw an opportunity back then, I wonder whether you still see one now.
H.E. YASIR AL-RUMAYYAN: First of all, good morning, David. It’s really a great honor for me to be on this panel with great people like Steve and Robert. We saw opportunity with this big pandemic, and we thought that this is very similar to most of the other crises that we’ve seen in the financial markets throughout the decades. 2009, 2001, in 2000. So we were actually discussing that the year 2020 could be the end of the bull market, which was like one of the longest bull markets that we’ve witnessed since the start of the equity markets all over the world. So we were prepared and we had a lot of cash waiting on the side lines, and we came in with three types of strategies to the international markets and also the domestic market. One, to have some strategic positions; two, to have some opportunistic positions; and three, a kind of rescue finance. And we got there and, as you say, in March, April, and we were — and most of the markets in the U.S., Europe, China, everywhere, even in the Saudi market, too. We, of course, saw some of the opportunities to sell some of these positions, and we did, in the opportunistic approach, but we’re keeping some of these positions, and also we’re in talks for the rescue financing with some companies.
DAVID FABER: And where do you see things now? You obviously saw an opportunity, the markets were down significantly. We’ve rebounded dramatically since then. You said you’re keeping some of the positions you took, you see them as more long-term strategic positions. Would you initiate any new positions now, or is it your feeling perhaps that the market is a bit overvalued?
H.E. YASIR AL-RUMAYYAN: I mean, if you look at the market, at different sectors, some of the sectors have really outgrown themselves, and that’s why we thought maybe it’s better for us to lower our exposure in these companies and sectors, but some others still have the big potential to go even higher from here.
DAVID FABER: Robert, your business is obviously taking companies out of the public market, but I’d love to get your sense right now to this overall point. In terms of valuation, we’ve seen software companies where you obviously know things extraordinarily well and have done incredibly well in terms of take-privates. We see them trading at multiples to sales that we haven’t seen in a very long time. Is it becoming more difficult, perhaps, to find something to buy? Are you a bit scared, perhaps, at what you’re seeing, in terms of both multiples to earnings and/or if there aren’t any earnings, multiples to sales?
ROBERT SMITH: David, thank you for inviting me. And, Yasir and Stephen, always a pleasure to share time with you, too, and look forward to seeing you in person soon. David, what is interesting in our sector, enterprise software, is, you know, we continue to see companies with very strong revenue growth, and if they’re run well with our work, they are actually accelerating in this time period. The fact is that there’s this massive demand for digitization globally, and because there’s also been a distribution of computing power over the last 20 years, there’s actually a large number of software companies that are actually getting to a state of maturity, some of which are cloud native. So that creates many more buying opportunities. While, you know, 20 years ago, there were fewer investors in the space, and now there’s multiples of what there were, one of the keys is understanding what businesses are the right businesses to invest in as a private equity firm. From our perspective, really interesting, the public markets continue to focus on what we call hardware and consumer technology, consumer software, whereas the private markets, private equity, we focus mainly on enterprise and IT services. As a result of that, there’s actually a little bit of a dislocation of opportunity, because again 98 percent of software companies, enterprise software companies are private. So in order to participate in this market, you really need to be in a private marketplace. And I know the SEC has made some recent announcements to relax the accredited investor rules, so that’s going to put some more capital into the hands of the private markets. But I think the days of 10, 11, 12 times EBITDA multiples, two or three time recurring revenue multiples are likely gone, because people are realizing the resiliency of these businesses. And when they’re run well, they provide excellent return opportunities for investors.
DAVID FABER: Right. But, I mean, it still matters where you get in, no matter how much work and how much value you may add over time, Robert, the entry point is still an important one. Are you saying that you’re seeing valuations in the private market that are better in terms of the public market and that’s where you’re going to play?
ROBERT SMITH: We do. When we see dislocations in the public market, we tend to act. But in the private markets, part of it is, can you improve the operations of the businesses and actually accelerate the growth? Software, enterprise software in particular, you have the ability to accelerate the top line through leveraging newer technologies. You’ve heard of artificial intelligence and machine learning and RPA, etc, so you actually have some levels of controls over the, call it the financial picture of those businesses, so long as you’re able to structure the companies well. So that’s one of the dynamics, you can actually improve the operations. And there is just a massive demand for the products that our companies sell, and that’s going to continue to, what I call grow into the multiples quite well. And there is a flood of capital moving into the marketplace which actually, again, pushes those multiples up on the exit side.
DAVID FABER: Right. I mean, it’s a good time to exit, I guess to a certain extent. There does seem to be some froth around a lot of IPOs, whether they be direct listings like we’re seeing today with Palantir or more traditional ones.
ROBERT SMITH: Yeah, it’s been interesting. The private equity-backed software companies have actually performed better from our analysis than others, and I think it’s because we do a good job of actually building infrastructure so these businesses have some sustainability once they get into the marketplace. And again, there’s just demand for public market enterprise software companies and there just are very few relative to the private markets, so I think that trend and that momentum is going to carry forward for quite some time.
DAVID FABER: Stephen, you have a broad perspective over a lot of different markets, of course. I’m curious as to whether you are concerned about overvaluation in certain parts of the market, whether it be as we’ve been discussing to a certain extent technology and/or where there are areas where you see real opportunity, given again your sort of broader perspective at Blackstone.
STEPHEN SCHWARZMAN: Thanks a lot, David. It’s great to be on with Yasir and Robert. I think Yasir did an amazing job sort of calling the bottom. And Robert has done really quite an outstanding job in terms of buying software companies. As to your question, where are we, I think we have some tech-related things that are at very high valuations. We have other parts of the economy that are undervalued. And the indexes, of course, have done great, but they are way overweighted to technology and so not all companies have recovered their valuations. So it gives you a chance, on the one hand, to play some type of technology things because the power of what’s going on in that area, as the world is going digital at a much faster rate, exists. And it also is possible to buy other companies that haven’t rebounded to the same degree. In both cases, as Robert mentioned, the way you make money isn’t just by buying something, it’s improving the operations. That’s what we do in the private equity area. And that’s one reason why the returns historically have averaged somewhere for the good firms 500 basis points or more over the stock market. It’s not a surprise, if you buy things at a good price and accelerate the growth, have some leverage on it, the company will be safe and the returns will be significantly in excess of alternative things you could own.
DAVID FABER: Yeah, although you know the criticism, which goes, Hey, listen, if I could lever the S&P five or six times, I would have returns that exceeded those of private equity. What do you say to people who come back at you with that?
STEPHEN SCHWARZMAN: I think, David, if you did that, you would probably end up going broke at some time. Private equity doesn’t — what’s important is the unleveraged growth rate. Private equity firms that are well managed increase the growth rates of companies very substantially, and when you add a little bit of leverage, it accelerates it even more. But the key, as we look at things, is what is the unleveraged growth rate and how fast can we drive growth? And what that does is it has you hiring more people and spending more money on expansion, because you can’t grow fast without more human beings. So it’s actually a very positive business model that also helps people who are retiring or need more in the way of performance. So it’s really a positive sums game.
DAVID FABER: Stephen, specific to your portfolio, real estate, of which you are one of the largest holders, if not the largest in the world, you know, you own warehouses, which I would assume have been extraordinarily positive given what’s going on in terms of digital commerce, but I’m curious on the commercial real estate side what your thoughts are there, whether we’re going to see office buildings come back to full occupancy, whether there is going to be significant distress perhaps for quite some time to come.
STEPHEN SCHWARZMAN: That’s a great question, David. In our real estate business, we’re theme investors. What that means is we look at the world and try and figure out where it’s going. And, as Wayne Gretzky, the hockey player would say, we skate to where the puck is going to be. So we made an observation and decision years ago that the digital revolution was going to really affect real estate and, as a result of that, we sold almost all of our retail that we owned and we started concentrating in warehouses. Why warehouses? It’s now got a fancy name called “logistics.” It’s because it’s part of the distribution network for the internet and for internet shopping, which is exploding. So what we’ve found is where there’s some softness, for example, in malls, there’s nothing but increases in warehouses. We put a third of all of our money there. We sold all of our hotels. And now that turns out to be — or substantially all of them — turns out to be a great thing. We put more money into residential, where people are in apartments and paying their rent. So we look at a lot of this. And even in office, there’s different kinds of office. So we own office, but it’s almost always specialty office. So, for example, we’re the largest owner or second largest owner in the world in health care office buildings. In effect, research labs. And that business is doing great. Everyone’s paying their rent, and those values are going up. For general office, which we don’t have much exposure to, but is an interesting question, which I think is where you were going — it’s sort of unclear how things are going to work out at the moment. In certain urban centers, affected by COVID like all, people have stopped coming to the office, and that’s a natural short-term approach. I think that that will reverse, you know, and we’ve found, as we opened our office several weeks ago, people are coming back. It’s really just a hostage to COVID. And, in that sense, I think it will take some period of time for the vaccines to be developed, distributed, and other types of breakthroughs in medicines to occur, the rapid testing I think that was mentioned, and then people will be much more comfortable going back. I’m not a pessimist in terms of people being in offices. It’s very hard in certain businesses to train the people who join you. You can operate at a distance with people you know well in certain businesses and industries, but as people enter an organization, they must learn the culture of your company, and it’s hard to do that virtually.
DAVID FABER: Yeah.
STEPHEN SCHWARZMAN: So I think we’ll have uneven outcomes in office buildings, but it will also depend geographically where you are. Certain places will be tougher to get going, and other places will be easier.
DAVID FABER: Yeah. Robert, I’m curious to just get your quick thoughts on this. In terms of the portfolio of companies you have, particularly given the technology nature of them, are people happy working remotely? Is that something you see continuing long into the future, or do you agree with Stephen to a certain extent that culture really loses out over time?
ROBERT SMITH: Yeah, I think Stephen has it exactly right. In certain of our businesses, there’s — I’ll call it more demand, even by the employees, to get back together. You know, the on-ramping of new employees is an obvious space where we need to ensure that the culture gets embedded and we have the ability to drive forward the values of not only the firm, but the businesses that we have the opportunity to partner with. But what we’re seeing, in many cases, productivity increases with people working from home. You know, you’re losing less in the friction of commuting, but it’s really the team orientation. If you get that right, you can get some of that productivity. But I can see already across our portfolio, there’s a longing for more contact. So, you know, there are systems and tools that we can do, utilize to make that accelerate, and, you know, part of our dynamic has always been, to Stephen’s point, increasing the number of employees in our businesses. And you have to have systems to onramp those employees. Private equity, generally, when done well and executed properly, increases the number of its employees well over non-private equity-owned businesses. Ours, in particular, over 20 percent by the time we buy a company, and then when we sell it, in terms of employee increase, but you have to have systems in order to onboard those employees well and get them embedded into the fabric of who we are as a company and what our mission is.
DAVID FABER: But you see remote as a percentage overall going forward, some percentage of every company going to have, you know, 10, 15, 20 percent of the employees out of the office at any one time?
ROBERT SMITH: Obviously, David, I think we’re going to end up with a new equilibrium, and that equilibrium is going to be a bit more of a hybrid model, and I think we will find what the right stasis is in that context. We are seeing, again, massive productivity with work from home in our developer organization. We have about 50 thousand developers worldwide. But, you know, those are developers who are already on board, already working. The real question is how do you bring in and inculcate the newer folks into what is the mission and the process going forward. So, you know, we’ll emerge to what I call a new equilibrium, that will likely have more work from home as opposed to what we have experienced in the past.
DAVID FABER: Yasir, I want to get back to investing and I want to get back to you. You know, you mentioned rescue financing as part of at least the allocation that you made to the U.S. market back in late March and April. There are plenty of areas that could still use some money. Airlines, for example, which are facing significant layoffs if they don’t get money. Where would you consider playing in terms of, as you described it, rescue financing here in the U.S.?
H.E. YASIR AL-RUMAYYAN: The airline industry is a good example, of course, of what’s stated in one of the investments in the airline, but not that – many other sectors, I think the hotel business, which is not what Steve is thinking of, but I think another opportunity, the cruise liners, the entertainment, generally speaking, could be. Oil and gas rigs are not — could be. So the thing about PIF is the diversity of our investments. So we have all kinds of companies, we have all kinds of different investment tools, and I think if we can go into some of these companies for rescue, what we can do is not only provide the money to them, but we can provide even the businesses. So some of these rescue financing would be with the strategic aspect to us. So we go into these companies and see what we can bring back from there to Saudi and how to improve it, how we can give them offtakes, bring in their technologies. So we are open to all sectors that matter to us with the vision 2030 that we have in Saudi and how we can progress more towards these bought.
DAVID FABER: Obviously your allocations, as you point out, many are within Saudi, they also include some international, and you’ve got your real estate, your giga projects, another one has been an allocation to SoftBank for the Vision Fund. You were the largest single investor at the PIF, I believe. I’m curious as to whether you’re still happy with the performance of the Vision Fund and your partnership with SoftBank.
H.E. YASIR AL-RUMAYYAN: Vision Fund was basically tailored because the thinking was very much aligned between what we think of the future and what Masa Son and the SoftBank Vision Fund is thinking of the future. This is the largest single fundraise in the history, $100 billion, we are committed to $45 billion. The fund already invested in, like, 85 different companies. Out of these companies, we would find, number one, unicorns; number two, we would find some JV opportunities for us to bring some of these companies to Saudi. And the performance, the last time they announced that, I think, was at first around $2 billion. It’s not the greatest performance, but still it’s not down, which is something really good, especially with this kind of investment. It’s more of early stage JV/VC kind of investments. So I think once the fund is closed, you will find a better –
DAVID FABER: I’m curious, Yasir, somebody who knows SoftBank well and has that partnership, the company itself has been monetizing a lot of its assets of late, whether it’s the sale of ARM to Nvidia, the sale of T-Mobile stock, I can go on and on, and it also played very heavily in options here in the U.S. market. It does seem to be changing its complexion a bit, and I wonder if that’s concerning to you at all in terms of what seems to be a shorter term focus for SoftBank, as opposed to what Masa has always talked about, of course, as his more than hundred year opportunity set.
H.E. YASIR AL-RUMAYYAN: You’re right. But the SoftBank company is not the SoftBank Vision Fund, so it’s different investment strategies. And I think with the options — I’m really not familiar with what is exactly that they are doing with the option, if it’s, you know, some kind of a hedge that they have, and maybe that’s the case. So I’m really not sure how they’re doing it. But if it’s for the short term, it’s — that’s their investment decision, but I’m not part of that. I went with money, is not with them, but —
DAVID FABER: Right, right. It’s in the Vision Fund. Understood.
H.E. YASIR AL-RUMAYYAN: No, it’s in the company, it’s not the Vision Fund. Our money is in the Vision Fund.
DAVID FABER: Right. I got it. One company, though, that you have invested in directly is Uber, and I would be remiss if I didn’t sort of come to you on that. And specific as well, I would love to get your thoughts on autonomous vehicles. It’s something we’ve been talking about for years here; and, in fact, it feels as though it’s still something we will be talking about years from now. I can remember having conversations with Uber’s founder, Travis Kalanick, privately where he said by 2020, you’re going to be looking out at New York City and see autonomous vehicles. It’s still an important part of the strategy in some ways at Uber. How do you view it and are you disappointed with the lack of development overall in that area?
H.E. YASIR AL-RUMAYYAN: I think just like anything else — if you remember the iPod, when it started, it wasn’t the first thing, but it took them years from the MP3 player until they got the iPod. And then, you know, the whole thing exploded from there. Everybody turned to the digital music. I think the same thing will happen with the autonomous vehicles. The problem that I see is there is not enough collaboration between different companies when it comes to the autonomous vehicles. Different strategies, different science, different methodologies, and that’s why it’s like going back, it’s not going forward. I think once you have the autonomous vehicle companies work together, share their information, open up, I think you will have it even sooner than anyone would have expected. But the problem is everybody is working with different tech: laser, radar, infrared, LeddarOne, AI. So, we just need to put those guys together and then you will have it.
DAVID FABER: Robert, it sounds like an opportunity in some way. I’m curious as to your thoughts on this as well. Are we going to make real progress here, or are we going to be talking about this — which will be transformative when it finally comes — for years to come?
ROBERT SMITH: Yeah, you know, innovation goes through stages and — call it surges. And across, you know, the tech sector, generally, there’s a hardware innovation, a software innovation, and you have multiple iterations of the software innovative dynamic that lead to what I call the next breakthrough in a space. And, look, I think we will ultimately see breakthroughs that will change the consumer mobility dynamic pretty dramatically, and it’s going to come from multiple dimensions. I think the important thing that we always look at is just, you know, what’s the supply/demand of capacity. You know, again, there are seven and a half billion people on the planet. There’s probably only about 29 million of us that actually know how to write code. So we need to get more people writing code and contributing across the various sectors. I think autonomous vehicles is likely going to move first in the trucking and transportation space before we get to the consumer space en masse, because I think there’s just massive benefits that can be captured and monetized in that space. So I think we’ll see the surging across those sectors in different ways, and that development and innovation dynamic happening simultaneously from different angles, and then we’ll see the breakthroughs in coming years.
DAVID FABER: Yeah. When you say “years,” I mean, do you have any sense as to what we’re talking about, when we’ll actually start so see them en masse?
ROBERT SMITH: No. Again, I think we’ll just see it at the edges. Testing is occurring in multiple places across the planet, frankly. I’ve seen some in parts of Asia, parts of the U.S., and parts of Europe. And I think you’ll see those innovations kind of develop on top of each other. Probably within the next decade or so, my sense is you’re going to see a convergence of autonomous driving in the transportation/trucking space probably more utilized than in the consumer space.
DAVID FABER: Yeah. Yasir, when we talk about “autonomous” oftentimes in the future, we’re also talking about EV. It’s still a very small percentage of overall sales right now. But as chairman of Saudi Aramco, I’m curious as to how you see that developing as you change the complexion of that company and the Saudi economy as well, in part due to, I guess, what you believe will eventually be a lot more electric vehicles on the road.
H.E. YASIR AL-RUMAYYAN: The EV is common and, in fact, at the PIF, we’re one of the — we are the largest investor in Lucid, which is an EV company that has the greatest product that will go live, I think, in Q1 2021, that will have the longest range, which is 500 miles, way above the second best. In Aramco, we see that spot – remember, the oil is not only pulled from — for transportation, it’s for many other things. In fact, in Saudi Arabia, we would like to have less oil, for instance, producing energy. Our energy mix hopefully by 2031 or ’32 will have zero liquid, we’ll have gas renewables, and solar and wind, in addition to that. We think the demand in oil will continue the problem, and, at the same time, the supply will really fall below. If you look at the announcements from the IOCs, the oil companies, Aramco, they all stop their CAPEX programs for the coming five to ten years, except for Aramco. We continue on the exploration, and we’re continuing on building our capacity, and we are the most resilient company when it comes to providing the world with oil. The uses also are going to leave oil to petrochemical, which is a new thing. We would invest it for lines in MPM and invest it now. We acquired 70 percent of SABIC, which is the doing the — center part. So we know that the EV will have an impact on the transfer. It’s not going to happen immediately because now if you look at the EV, it represents less than 1 percent of the automobiles around the world. But eventually it will grow.
DAVID FABER: Finally, Stephen, let me just come back to you. We haven’t really had an opportunity here, and we’re not going to have one, unfortunately, to discuss the macroeconomy broadly speaking. Stephen, we’ve talked about China with you in the past. You’ve been a proponent, of course, of free trade in many ways. I’m curious just to get your quick perspective on things, given what seems to be a continuing degenerating situation between the U.S. and China, the two largest economies in the world. Does it concern you and is it keeping you from doing certain things at Blackstone that you might otherwise do in terms of investments?
STEPHEN SCHWARZMAN: Well, you’re certainly right, David, about the tension level between the U.S. and China. And that’s been growing pretty rapidly. These are two different systems of governance, and two different levels of openness and compliance with rules. On the other hand, these two countries, depending upon how you measure, have between 35 and 40 percent of the world’s entire economy. There are over 200 countries in the world, and these two are huge by the standards of any normal distribution. And so, on a longer-term basis, there’s going to need to be some type of better integration and relationship with these countries. What’s going on currently is a bit of separation, particularly in technology. China has always lived behind its great firewall, if you will, and now the U.S. is responding in a similar fashion. There was actually something positive that happened with the Phase I trade agreement, which was viewed as a very good thing in China, and I think these situations move in waves. And the pandemic has exacerbated things in a way that is, on one level, understandable, but also very profound and a black swan, if you will, unexpected event. So I think we have to stick with this. These two countries are too big, too powerful to be in an adversarial mode. There is no need for that, and there’s lots of good things they can do together in terms of the environment and other things regarding ESG. With the help of these two countries leading the world, it will be a better world. So I’m not being a Pollyanna on this. Each country is developing in its own way to fulfill what it can. China will probably grow 2 percent this year, the fastest growing in the whole world, pretty remarkable. And they will continue to grow. The U.S. will recover. And so they will find their peace, just not tomorrow or the next day.
DAVID FABER: Yeah. And finally, Stephen, when are you going to bring people back to the offices in Midtown?
STEPHEN SCHWARZMAN: Well, we opened our offices July 13. We have — particularly in New York, which is our biggest, we have about I guess somewhere around 35, 40 percent of the people back. We do weekly testing for everyone. We’ve had a remarkable result with that, way, way less than 1 percent of the people. We put in all kinds of safety measures of every type, from, you know, temperatures before you enter, separation, limitations of how many people in a conference room, let alone your office, masks. Everything that you can imagine, we’re doing to make our people safe. Once people are aware that you can be safe in an environment, I think there will be more and more people coming back.
DAVID FABER: And we look forward to that. And we look forward to being in person together at our Delivering Alpha in the future. But gentlemen, I want to certainly thank you for your participation this morning. We very much appreciate it. Thank you.
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