Chapter 1: What is the main topic discussed in this episode?
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Let's turn to private equity. The consortium bank Electronic Arts is set to add more than a dozen banks to its underwriting group after JP Morgan put up $20 billion of debt to bankroll the leveraged buyout. The banks are in line to share roughly $500 million in fees for arranging the financing. Joining us now, a man who knows something about a leveraged buyout, Steve Paluca of Bain Capital.
Steve, it's good to see you, sir.
Good to be here.
Good morning. Let's reflect on your time. The largest leveraged buyout ever before this one was HCA back in 2006, 2007. You were right there in the middle of it. Describe that moment and how it compares to what we're seeing play out now.
Well, it's really interesting. I think that buyout was $5 billion equity and $27 billion debt. This buyout is much more equity, kind of $30 billion of equity and $20 billion of debt, maybe $35 billion of equity. So The markets have changed to that extent that you can't leverage as much, but the EBITDA is a little less. Very quality sponsors, and J.P. Morgan is a very quality bank.
So they did the deal because of the great growth in gaming and media and entertainment, and I think it's a very solid company.
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Chapter 2: What is the focus of Steve Pagliuca's discussion on private credit?
JP Morgan, especially Bank of America, well-run, well-capitalized banks. And private credit is different than credit from banks because if it does go bad, you only write off the equity from people who put the equity in. It doesn't have a systemic multiplier effect. So I'm less concerned about private credit. What I'm more concerned about is the size of the national debt.
and how much interest we're spending on the national debt. It's really interesting, if you go back to when I got out of business school, there was a huge sermon drawing about the national debt passing one trillion. That's in 1982. So it took 250 years to have $1 trillion of national debt. In the last 40 years, we now have $37 trillion, which is more than the GDP. The GDP is about $30 trillion.
So that concerns me more in terms of the impact on the dollar. Interest rates are interest from the government now is one of the highest expenditures. It's right up there with defense and health care. So that concerns me more than private credits.
So Steve, I could probably find you people who were concerned back in the 80s too. And then in the 2000s, and as we went through 10 trillion, 20 trillion, and kept going higher, they were concerned all the way up. Why is this moment different?
Well, I think, I don't know if it is different, but in situations like this, it's always okay till it isn't okay. So you get used to it. You pass a trillion. Everett Dirksen had a board up that was counting it up at that time. And it passed a trillion.
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Chapter 3: How does Steve compare the current leveraged buyout to past experiences?
There was a huge outcry. Now it's $10 trillion, then $20 trillion, then $30 trillion. But at some point, you've got to have some long-term plan to pay that money back and get that deficit down because it's eating up huge amounts of the government budget. And as the interest rates roll over, a lot of that is still financed in the old, really low interest rates.
They're going to have to refinance it at 5%, 4.5%. And then the number goes up again.
Well, when you see what's going on in Washington, I want to go back to your EA deal. It's not just the size and scope that got a ton of people's attention. There's concern in Washington, given some of the players involved. Have you heard from politicians about that?
I don't think there's been a lot of pushback on that. And the deal, I think, will be controlled by Silverlake, which is an American fantastic private equity company.
But with the Saudi PIF being involved, some people think Jared Kushner was brought in just to get the Czech government seal of approval.
You know, again, I think Silverlake's a fantastic firm and they're leading the charge there. And so I think there's really going to be no concern because they'll be calling the shots on the deal.
Steve, we started this conversation by comparing this deal to HCA in 06, 07. Have the pools of capital changed in the last 20 years?
Yeah, absolutely. You know, when I started out in the industry, there was only three or four firms doing this, I think, in general. And it was mostly USA. Now it's global. The fund sizes are up probably... 20 times from when I started. And also you have sovereigns and biddy constitutional players partnering with private equity. So the dry powder is huge.
Are there enough opportunities to go around? You know, I got asked that question in 1989. I'm asking it again, 27 years later. And I feel like a broken record. Private equity, I think, is here to stay. The model has really evolved. So it really is huge value added to transform companies, make them better, globalize them.
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Chapter 4: What concerns does Steve have regarding the US national debt?
We've kind of stood down for now, and we're going to abide by whatever the NBA wants to do with the team. I think it's very exciting. The ratings are huge for WNBA, and I think it's great that all Americans are following that sport now, and it's going to really take off, and the NBA's done a great job with that. You've done a great job, Steve. It's always good to catch up with you. What a career.
It feels like you're having the best of times now.
You know, I've been very fortunate. My grandfather came from Italy on a boat with one suitcase and worked in a shoe factory here in New York in the Bronx for $8 a week. So I would say America is a great place coming from that. And I've loved the homecoming, coming back to Italy with Atalanta. I get off the plane and I love it because everyone looks like me there.
I haven't lost my Italian heritage. We've talked extensively about this in the past together offline, and I'm very proud of you and everything you've done. Steve, thank you, sir. I really appreciate it. Thank you. Steve Pagliuca of Bain Capital.
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Chapter 5: What are the implications of high national debt on the economy?
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