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Brad Gerstner — Altimeter Capital

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Background

Brad runs Altimeter Capital Management, a technology focused investment firm based in Menlo Park, CA and Boston, MA. Altimeter manages a long/short public equity fund and growth stage venture capital funds.

Primary Takeaway: The interplay between investing in private and public markets is underrated and there are massive information synergies between these two sets of activities.

The 3 Waves of the Consumer Internet and the "Transition Tax"

In western markets, there have been three major waves of the consumer internet. The central determinant of each subsequent paradigm shift has had to do with innovation that shifted consumer discovery of content and products.

China's trajectory has been compressed and the platform shifts have happened faster thanks to the leapfrog effect of never broadly adopting desktop computing as well as the early rise of the Super App. More recently, these Super App trends have had a significant impact on the product strategy of large US tech companies like Snap (Minis) and Apple (App Clips)

I have pulled notes from the podcast discussion and highlighted some things I thought were particularly interesting.

I. Google Search

The high quality insight that I had dating back, frankly, to 2002 or 2003 was that all search and discovery was migrating toward Google and that all intent on the internet was going to be funneled through this super aggregator. And if you could figure out how to optimize yourself within the Google ecosystem, that you could effectively build really big businesses in the underbelly of Google.

Booking.com is the one that's most famous. We started investing in it when it was a billion dollar business. And Priceline became the single largest global advertiser on Google, and built $100b vertical search business by providing better access to hotels and hotel inventory. But that business would not have existed without Google.

If you look at the vertical search engines that we invested in, in this first, if I think about the first era of the internet being dominated by search, we had an insight that vertical search was going to be a significant beneficiary. So my largest investment, when I started investing on the public side in 2005, was Google. But on the private side, we invested in companies like kayak, Zillow, where we led the Series B and I went on the board, I started a company called room 77. An open list that were both vertical search engines and all of the online travel agencies were really vertical search engines, Yelp, TripAdvisor, etc.

The high quality insight was simply that Google was going to do more searches in the future than they did in the past, and that the revenue per search was going to go up over time.

II. Mobile OS (iOS / Android)

By 2012, we had a couple seminal events occur.

I remember in a period of months, Facebook goes public at $38 per share, it falls and breaks its IPO price. You have desktop search for queries that we follow, like hotel queries, actually went negative on Google in 2012.

What happened was the rise of iOS, the rise of iPhones created this platform where discovery and intent was beginning to shift to the supercomputer in your pocket two applications that were on the homepage of said supercomputer and away from Google And that had profound implications for the defining thesis of the internet that we had invested against for a decade. And it was going to have implications for Google...

But Google is in best position to deal with this because they famously under monetize the platform for years. As Bill Gurley and I often talked about back in those years, the tax collector would eventually come.

TripAdvisor and Yelp went from being the biggest beneficiaries of Google — would not have existed without Google — to testifying to the Senate about the rate of Google's tax collection. And all of that was bound to occur as Google's own query volumes started to diminish. And so you had the rise of this new way that people were discovering information, people were discovering destinations, they wanted to travel to clothes they wanted to purchase, etc.

III. Super Apps

So fast forward to the themes around internet we're investing against today and it's really the rise of the super app.

We invested in an early round in ByteDance, which happens to be one of our bigger private holdings today. And the observation in China was that we saw the shift away from search away from Baidu. Baidu is worth 50% less today than it was six years ago. notwithstanding the fact that all of the big internet platforms in China are worth multiples today of what they were five years ago.

You had the rise of WeChat, you had the rise of ByteDance, and you had the rise of Pinduoduo that were giving people access to the information they want — whether it's purchasing information, shopping information, news, information, entertainment information and they didn't have to be funneled through Baidu to discover that information.

Facebook became our largest position in 2012 and hile we've managed the position over a period of time, it's still our largest position in the fund today. And that was driven by this instance of saying that...we had this pretty significant shift away from search. Search is clearly still important, but increasingly commercial intent is occurring in other places.

Super App Resources

Sharing a non-comprehensive list of things I've found interesting on the topic of Super Apps. Let me know if you've come across anything else!

Let Compounders Compound

Our objective is to find terrific companies that can be multi-year compounders in secular growth areas that are denting the universe in one way or another.

We thought then (when starting Altimeter) and we believe even stronger now that a lot of that value creation would occur in the private markets. So when I started in the Venture business back in 1999 2000, a big exit was a couple hundred million dollars or a billion dollar exit. A billion dollar exit to a single venture firm, put them in the Hall of Fame. But if you look at it today, we have internet companies that are going to go public, after having created $200 billion of equity value in the case of ByteDance or software companies that go public after generating 10's of billions of dollars in enterprise value.

So a lot of that value capture has moved to the private markets. From our perspective, we want to participate in that value capture in these long term compounders over the lifecycle of the business. And oftentimes for companies we invested in at Series B or C, we're the largest buyer in the IPO. And we may own those companies for years after.

So when I think about generating alpha, one of the keys for us is obviously stock selection. But it's over the lifecycle of the business, allowing our compounders to compound, and then making sure that we own them in sufficient concentration that it can really move the needle for the fund.

Buffett Quote: My highest returning investments — those that have really made the cash register — ring have come from simple qualitative insights applied to a big business opportunity.

On early crossover (public + private) investing

And so that's what I did. I started with less than $5 million. My first day of trading was November 1 2008. The vision I had when I started in 2005.

Getting back to your original question, I said to Paul, listen, I want to run the technology book of your business, but I want to do both public and private. He said, "great, just make good investments".

So on the private side, we led the Series B in Zillow, ITA Software, Farecast that we sold to Microsoft that became Bing Travel, Sidestep. On the public side, Google, Priceline, and a bunch of not a bunch, but a handful of other internet companies. And the observation was just that there are massive information synergies between these two sets of activities.

And back to your point around collaboration. If you think about where the best research you do, oftentimes on the public side, it's not calling up sell side analysts at Goldman Sachs and asking them what they think about ByteDance, or what they think about Alibaba. It's calling up Bill Gurley, or Rich Barton or other folks who, you know, are listening to you. The networks that I developed, having started businesses in the venture world were profoundly important in shaping my thinking that would lead to our biggest public investment.

The evolution of investing and optimizing for happiness:

I started in the investment business in Boston.

And in Boston, there are a few great investors that I spent time talking — Seth Klarman from Baupost, David Abrams from Abrams Capital, Paul Reader, and they were all running very throwback funds. These funds look like Buffett's original hedge fund. Like if you ask Buffett back in 1965, why did you invest in a private company out of your hedge fund? He would say, Well, I invest in good companies, I just go try to find the best investment, my LPs who happened to be my friends and wealthy families, this was before you had an institutional class of LPs, they just get a pro rata share of all my best ideas, and some of them are public, and some of them are private. And it clearly still runs Berkshire that way today. And so that was my exposure. And if you really look at the evolution of institutional investing, it was LPs, who pushed the investment firms into specialization. We want the best at venture the best at mid-stage private equity, the best at late stage private equity, the best at this type of hedge fund absolute return, macro, etc.

And so the investors started forcing themselves into formulas that, for me, didn't look particularly interesting, looked very difficult to generate meaningful alpha over a long period of time, and certainly didn't optimize my happiness.

Value accruing disproportionately to the private markets:

One of the things we presented probably six years ago was a slide that was talking about how much incremental value creation was accruing in the private markets and why that was occurring. First and foremost, you had platforms that were now allowing companies to scale faster, and in a more capital efficient way.

So if you think about where Google went public, if you think about where Priceline went public, compare that to where ByteDance is going to go public compare their path to $10 billion in revenue at Facebook. With every successive generation, the winners scale faster, they scale in a more capital efficient manner. In the case of ByteDance, likely will go public at $150 to $200 billion valuation. All of that value creation accrued to the private market investors.

Compare where the software companies that are in the pipeline, or that have recently gone public — compare those valuations to where Salesforce went public, and I know you had Chethan on, he does a great job in Twitter, reminding us all of this, but the fact of the matter is because of AWS, GCP, and Azure software companies are scaling faster, and in a more capital efficient way, and as a result of that, for the winners, the first 10 or $15 billion of value creation is likely to accrue to private market participants.

So it's not just that you have information advantages, it's not just that there's less competition, it's not just that you can be a lifecycle investor and invest through the period of time where the company's worth $200 million to $20 billion. If you're Fidelity, if you're T Rowe, if you're one of these companies that wants to participate in all of that value creation, you can't not be in the private markets.

Illiquidity as a virtue:

There's one other advantage to venture that I remind people, which is you can't sell. Illiquidity is a virtue.

The biggest mistake we've made as a firm and if I look around me for technology investors over the last two decades, it's what Buffett pointed out, way back in the day. You show up at the office every day, you do your homework, and you can't resist the urge to trade, because they're going to miss the next quarter. Because COVID is going to cause bookings to go down or whatever it might be at that moment. Until you did all this work, you bought the company, now you sold it, and then it goes up 30% against you.

And now you have behavioral lock, and you don't want to buy it back. Because it's up 30%, you're going to wait until it comes back down. But then it doesn't come back down or when it does come down, you're panicked about something else. And so here, this business compounds in the case of MongoDB, at over 90% for the last five years, or Okta over 90% for the last five years. And then you look at your portfolio returns and you're like, wow, we own those in the private markets. How many gross profit dollars have we generated from those extraordinary returns? And I would say that that's where that cultural north star, having that deep alignment with your LPs, and resisting that urge when you find those special companies in those big markets that are executing well...great management teams always figure out how to expand their TAM. I mean, look at Marc Benioff.

Just figure out how to expand the TAM, I would say that this idea of public and private, we feel incredibly blessed to live in the heart of Silicon Valley. And we're going to spend our lifetime investing against the continuing innovation that we think is going to drive our economy, both the software and the internet side, and we're far far from done.

Partial Episode Transcript

Patrick O'Shaughnessy

One of the great things about Altimeter is its crossover nature — you're doing both private and public investing. And this shift from public to private as the zone of value creation has got to be one of the most important and interesting trends. And I would just be curious to ask a few questions around this long term trend and how you think about it.

So the first is around collaboration. I've seen lots of occasions when you are making investments in the private market alongside or in collaboration with other great investors — I saw just scrolling through your feed that you and Eric Vishria had something done together, I think in the ML space — it seems like there's the opportunity to be fairly collaborative in the private markets in a way that doesn't really even make a lot of sense in the public markets. I'm curious if you agree with that. And maybe if you could shed some light on your experience there.

Brad Gerstner — Altimeter Yeah, it's greatly satisfying to do that. But let me first just click back and say, I started in the investment business in Boston. And in Boston, there are a few great investors that I spent time talking to Seth Klarman from Baupost, David Abrams from Abrams Capital, Paul Reader, and they were all running very throwback funds. These funds look like Buffett's original hedge fund. Like if you ask Buffett back in 1965, why did you invest in a private company out of your hedge fund? He would say, Well, I invest in good companies, I just go try to find the best investment, my LPs who happened to be my friends and wealthy families, this was before you had an institutional class of LPs, they just get a pro rata share of all my best ideas, and some of them are public, and some of them are private. And it clearly still runs Berkshire that way today. And so that was my exposure. And if you really look at the evolution of institutional investing, it was LPs, who pushed the investment firms into specialization. We want the best at venture the best at mid-stage private equity, the best at late stage private equity, the best at this type of hedge fund absolute return, macro, etc. And so the investors started forcing themselves into formulas that, for me, didn't look particularly interesting, looked very difficult to generate meaningful alpha over a long period of time, and certainly didn't optimize my happiness. So the biggest challenge that I had in raising Altimeter was, you know, saying like, this is what I'm going to do, and coming out of 2008 you know how many LPs wanted to invest in a hedge fund that was also going to have illiquid, private investments? Precisely zero. It would have been easy and I had plenty of people offer to make seed investments, but they said you can't do this or you can't do that. And fortunately, I had a mentor and Paul Reader who had started Park Capital with two and a half million bucks and grown it to at that point in time, well over a billion dollars. So I had a roadmap. Baupost started with less than $25 million, you go through these distress era funds that it started pretty small and grown great businesses.

And so that's what I did. I started with less than $5 million. My first day of trading was November 1 2008. The vision I had when I started in 2005. Getting back to your original question, I said to Paul, listen, I want to run the technology book of your business, but I want to do both public and private. He said, "great, just make good investments".

So on the private side, we led the Series B in Zillow, ITA Software, Farecast that we sold to Microsoft that became Bing Travel, Sidestep. On the public side, Google, Priceline, and a bunch of not a bunch, but a handful of other internet companies. And the observation was just that there are massive information synergies between these two sets of activities.

And back to your point around collaboration. If you think about where the best research you do, oftentimes on the public side, it's not calling up sell side analysts at Goldman Sachs and asking them what they think about ByteDance, or what they think about Alibaba. It's calling up Bill Gurley, or Rich Barton or other folks who, you know, are listening to you. The networks that I developed, having started businesses in the venture world were profoundly important in shaping my thinking that would lead to our biggest public investment.

Patrick O'Shaughnessy It's a fascinating change. And like you, I'm so interested in just good investments, right? Good companies, right. That's what makes this whole game interesting and fun. It's surprising to me that there's not more of it.

Brad Gerstner — Altimeter I would say one other thing or two other things. When I started this, nobody wanted them commingle. It was a hard sell. I would say today, all of our LPs and we are extraordinarily grateful for World Class LPs, and nobody questions it anymore.

One of the things we presented probably six years ago was a slide that was talking about how much incremental value creation was accruing in the private markets and why that was occurring. First and foremost, you had platforms that were now allowing companies to scale faster, and in a more capital efficient way.

So if you think about where Google went public, if you think about where Priceline went public, compare that to where ByteDance is going to go public compare their path to $10 billion in revenue at Facebook. With every successive generation, the winners scale faster, they scale in a more capital efficient manner, andin the case of ByteDance, likely will go public at $150 to $200 billion valuation. All of that value creation accrued to the private market investors.

Compare where the software companies that are in the pipeline, or that have recently gone public — compare those valuations to where Salesforce went public, and I know you had Chethan on, he does a great job in Twitter, reminding us all of this, but the fact of the matter is because of AWS, GCP, and Azure software companies are scaling faster, and in a more capital efficient way, and as a result of that, for the winners, the first 10 or $15 billion of value creation is likely to accrue to private market participants.

So it's not just that you have information advantages, it's not just that there's less competition, it's not just that you can be a lifecycle investor and invest through the period of time where the company's worth $200 million to $20 billion. If you're Fidelity, if you're T Rowe, if you're one of these companies that wants to participate in all of that value creation, you can't not be in the private markets.

There's one other advantage to venture that I remind people, which is you can't sell. Illiquidity is a virtue. The biggest mistake we've made as a firm and if I look around me for technology investors over the last two decades, it's what Buffett pointed out, way back in the day. You show up at the office every day, you do your homework, and you can't resist the urge to trade, because they're going to miss the next quarter. Because COVID is going to cause bookings to go down or whatever it might be at that moment. Until you did all this work, you bought the company, now you sold it, and then it goes up 30% against you. And now you have behavioral lock, and you don't want to buy it back. Because it's up 30%, you're going to wait until it comes back down. But then it doesn't come back down or when it does come down, you're panicked about something else. And so here, this business compounds in the case of MongoDB, at over 90% for the last five years, or Okta over 90% for the last five years. And then you look at your portfolio returns and you're like, wow, we own those in the private markets. How many gross profit dollars have we generated from those extraordinary returns? And I would say that that's where that cultural north star, having that deep alignment with your LPs, and resisting that urge when you find those special companies in those big markets that are executing well...great management teams always figure out how to expand their TAM. I mean, look at Marc Benioff. Just figure out how to expand the TAM, I would say that this idea of public and private, we feel incredibly blessed to live in the heart of Silicon Valley. And we're going to spend our lifetime investing against the continuing innovation that we think is going to drive our economy, both the software and the internet side, and we're far far from done.

Altimeter Capital Holdings

The firm has actively invested across public and private markets across the world. If you want the full list in CSV, let me know.

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Other Brad Gerstner Interviews

Gerstner on CNBC

This is the only video I've watched live on CNBC in years. I have no idea why I even had the website up at the time. But thought this was a very level-headed perspective ono the market at a time when things were absolutely crazy.

Chamath and Gerstner

This is mostly a Chamath interview but there are a lot of really good back and forths.