Altimeter's Brad Gerstner on taking Grab public in the largest SPAC ever, fixing broken IPOs | E1203

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Top Insights

• Brad's north star: doing what is in the best interest of founders, companies, and employees of the technology ecosystem that has been so good to him.
• For many of Brad's previous investments, the traditional IPO process was long, distracting, and lacked public markets investors with proper long-term alignment.
• Altimeter Capital's BHAG (Big Hairy Audacious Goal): to make going public as simple as a round of private financing. Better, fairer, faster!
• Invest America: Brad's idea to give every American a slice of the ownership of the economy. This program would give every child $2,000 in a locked 401k-style account invested in public equities. Over a lifetime, people would be able to participate in the growth of U.S. industry and to see the benefits of compound interest.
• Information asymmetries that generate large amounts of value for incumbents offer a massive opportunity for startups. People want the data and to decide for themselves. (Examples: Expedia disrupted the travel industry and Zillow is disrupting the residential real estate sales industry)

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Intro

• Brad Gerstner, CEO Altimeter Capital (2008 - Present). Previously Brad was the CEO of several technology companies in the travel industry and fund manager at Par Capital.
• Board seats: Orbitz (2010-2015), Hotel Tonight, Zillow (2007-2011)
• Past Episodes: All-In E11: Election night, All-IN E29: Coinbase goes public, direct listings vs IPOs, unions & more

The Problem with IPOs

Bill Gurley (Benchmark) & Rich Barton (Zillow) are thought leaders diagnosing why & how the IPO is just a broken a fatally broken process. Key costs from a traditional IPO include:

1. Bankers fee for underwriting the IPO & building the book of investors (~5-6% service fee)
2. Underpricing
3. Cap table randomization

1) Bankers Fee

• This fee charged is typically the least significant cost in the whole process. Paying for an experienced financial partner for one of the most important steps in a companies life is reasonable.

2) Underpricing

• Bill Gurley calls it an "overnight wealth transfer" because banks have a structural interest in underpricing. There is an exchange of value from the company to the bank's best clients.
• A company only goes public once, and then only sporadically raises capital as a public company.
• Large hedge funds and asset managers are the main clients of an investment bank's (highly -profitable) sales & trading arms. These money management firms pay commissions to place trades with the investment bank. These transactions are regular.
• In return for their consistent business, investment banks reward their clients with allocations of stock in hot companies they are taking public. Historically, there has been an emphasis on creating an IPO "pop" where there is a big price gain on the first day of trading to attract the interest of the financial press and reward IPO investors.
• For founders, employees, and early shareholders, underpricing means they give away more of their company for less money.

3) Cap table randomization

• Rich Barton calls IPOs a "cap table randomization event." The bankers taking you public are agents, not owners. They're collecting an agency commission (5-6%) for the service. They serving different interests than just your interests.

Show me the incentive, and I'll show you the outcome. - Charlie Munger

• In each late-stage round of VC financing (series D, E, and F) founders sell ~10% of their companies. Typically, the companies contact 5-10 investors and it takes them about two weeks. They handpick the people they want in their cap table. They set the price and typically raise $200M -1B.
• Brad believes going public should be similar to late-stage VC, but instead of selling equity to Dragoneer, Tiger Global, or Altimeter they sell to large asset managers like Fidelity, Blackrock, and T. Rowe Price.

"It's the exact same transaction, they want to sell 10% of their company raise a billion dollars and step into the public markets, and instead of it feeling like that late stage private round we embark on this Byzantine 12 month process." - Brad Gerstner

Altimeter's SPAC solution

• Altimeter wants to create a curated IPO. In the past, companies like Mongo & Twilio were in Altimeter's private portfolio. Brad wanted to buy more when they went public but could not because Altimeter was cut out of the IPO process.

The goal is, "Better, fairer, faster." - Brad Gerstner

• Altimeter acts as an "API into the public markets," with a service layer built on top of that. It's a capital markets business where they provide a turnkey solution from the book build, all the way through the IR (Investor Relations).

Zillow, Expedia, & "power to the people" business models

Rich Barton first founded Expedia (within Microsoft) & Zillow, both based on the same concept.

The Expedia story

• In the 90s, all tickets booked on an airline had to go through a reservation system (GDS - global distribution system) called SABRE (a spinoff of American Airlines). Travel agents would use this system to search, price, and book tickets.
• Because the reservation system was proprietary, (unsurprisingly) they charged a lot ($20 a ticket).
• Expedia and Orbitz built a direct API directly to the airlines. As a result, the price of the GDS went down by 75%.
• In summary: Previously, travel agents were the only ones with the relevant information needed to book a ticket. They would sit across from customers, looking at the green computer screen. Customers just wanted to see what they were looking at. Power to the people is turning that screen around to the customer (like what Expedia did).

Zillow

• Originally the idea was to buy and sell homes on the internet, "how do we create the Expedia for real estate." The problem was the realtors had the information.
• The real estate market was far more fragmented than airlines. With the airlines there were just 5 main players to connect to, there are thousands of franchised real estate brokerages.
• The "Zestimate" (valuing every home) was a genius idea to crowdsource an API.
• Co-Founder Lloyd Frink had the genius idea of matching mortgage pricing data with google maps. Zillow continued to add data streams to improve the Zestimate over time.
• Now finally Zillow (and Opendoor) are trying to drive down the cost of a home using information democratization.
• More choice & more competition are good for consumers.

How the Grab board decide to go with Brad & Altimeter as opposed to a traditional large investment bank

• It was announced that Grab will merge with Brad's SPAC Altimeter Growth Corporation (Nasdaq:AGC).
• Grab is a company that clearly could have gone public with any of the major investment banks but picked Altimeter.
• Typically, when a company wants to go public, they hire advisors to help them select a bank to lead the IPO effort (advisors are typically boutique investment banks such as Allen and Company).
• The Grab Board of Directors' decision to pick Altimeter took courage because boards are rarely punished for picking the default (J.P. Morgan, Morgan Stanley, Goldman, UBS, etc).
• Boards are governance tools that are designed to be conservative.

"The old adage is, you don't get fired for hiring McKinsey. It's the same for Goldman Sachs." - Brad Gerstner

• Brad's north star is very clear: he does what is in the best interest of founders, companies, and employees of the ecosystem that has been so good to him.
• To build the Altimeter Capital Markets Platform they deconstructed the entire value chain of an IPO, to create the "iBuy" of the IPO.

"This isn't about flipping a SPAC, this is about building a product like I built and four of three other companies." - Brad Gerstner

The Altimeter Team

• Altimeter brought in Chris Conforti who had built over 100 IPO books for Goldman Sachs (IPO Book = the funds that are investing when the company goes public). This experience allowed Altimeter to deeply understand the process of bringing mutual funds and asset managers together for public offering.
• Altimeter has relationships with public market investors, such as Will Danoff at Fidelity and Tony Kim at Blackrock. These firms manage trillions of dollars and are the essential long-term holders of great public companies.
• Being a public company requires more disclosure and communication than a private company. Altimeter brought on Derek Wong the former head of Investor Relations (IR) and Public Relations (PR) for Tableau.

Features & Focus

With Grab, Altimeter's sponsor promote shares are locked up for 3 years.

• Sponsor promote = the founders shares purchased by the sponsor for a nominal amount, typically ~20% of the company.
• Since these shares are at a deep discount for the sponsor, (for the work for creating the SPAC and taking the company public) it's important to create long-term alignment. Some SPAC sponsors see it as free money and invest little to none of their own money.

"I'm never gonna bring a company public that I'm not willing to lock up my sponsor promote, because frankly I want to bring the best of the best." - Brad Gerstner

• Altimeter's focus: help the best internet and software companies, including gaming, and fintech go public (about 3-4 a year).
• Altimeter will also participate in 40 Other IPOs, where they'll be an expert advisor on their traditional bank IPO (ex. Snowflake).

Grab & Delivery Discussion

Grab Stats (see the Grab investor presentation for more detail)

• Market leader in every Southeast Asia country they operate for delivery & rideshare.
• Operates in SE Asia, with an addressable market of 650M people across (Thailand, Cambodia, Indonesia, Malaysia, Myanmar, Philippines, Singapore, Vietnam).
• Currently have 25M monthly users (~3.8% of total region population)
• Large underbanked population in the region, GRAB is leading the way and bringing transactions online. It's still 80%+ cash payments in the region. There is not PayPal, Venmo, Affirm, etc.
• The supply of cars is restricted (A new Honda Accord in Singapore is over $100,000) so ridesharing is very practical in the region.

Changing Delivery Paradigms

• Companies offering 1hr delivery for convenience items can easily compete with Amazon.
• Amazon built their command and control supply chain infrastructure to support a world that didn't have on demand commerce.
• Brad believes we're going to move away from this command and control heavy capital expenditure supply chain to more instant commerce supportive of local stores.
• Back to the Future: The reason Kosmo and Urban Fetch didn't work is because we had 30 million people connected to the web, but they were all connected to a desk.

Uber's Global Expansion

• Uber sold it's SE Asia operations to Grab, and it's China operations to Didi. Now Uber has large stakes in both companies.
• When Jason asked Uber CEO Dara why he sold to Grab Dara said, "because they're going to win."

"What Travis and Emil did was so bold, so audacious, so crazy by any conventional standards. They literally going to own the globe for all of rideshare, and it was brilliant." - Brad Gerstner

• Uber probably created 20 to $25 billion of enterprise value by coming in second.

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Caution - investors need to do diligence

• Reducing friction enables activity.
• It's important that UI design choices for finance apps like SoFI and Robinhood default to incentivizing responsible behavior. When apps default to riskier actions like options and short-term trading, it's bad for consumers.
• Investor education, like a mini series 7

"Stocks are not lottery tickets."

• Diligence is decreasing on average, some investors have mistaken SPACs for get rich quick schemes.
• Because Altimeter is part hedge fund, they have short positions (betting the share price will fall) on a lot of SPACs. Many recent SPACs have selected companies that are "average at best" and are overpriced.
• Brad is not against retail investors. Brad grew up poor. His grandfather saved his whole life to give Brad $10K to attend college when he died. Investing is a powerful tool to improve your station in life.

Bad actors on Reddit, Twitter, Clubhouse & Youtube = Boiler Room operations

• 25 years ago Brad was a regulator at the Indiana Department of Securities. At that time boiler room operations in Florida were calling up grandmothers and grandfathers in Indiana and trying to promote nonsensical companies and stealing their money. He is a believer in investor protection laws and SEC enforcement.
• Brad sees similarities between Boiler Rooms and current behavior on the internet.

"There are people out there with millions of people following them for whom [joking about the silliness of the market] is not the intention. They are saying things, and they are going on the other side of the trade. That is illegal for professional investors, it is illegal for a retail investors and unfortunately I don't think retail investors even know that what they're doing it in certain situations is a violation of securities laws." - Brad Gerstner

• Market manipulation requires two things. It requires encouraging action (manipulation) and profiting from it.
• Brad wants premier investors (Altimeter, Social Capital, etc) to set the gold standard for investor education, transparency, and disclosure (Here is an example of Brad filing disclosure with the SEC from his appearance on the All In podcast)
• It was smart that Chamath donated the gains he made from a Gamestop trade. There are many people with large platforms that could be classified as market manipulators. The SEC is ultimately the arbiter of what is a joke and what is market manipulation.
• Communication & coordination technology platforms like Reddit and Twitter have evolved faster than regulation & enforcement tactics by the SEC (Securities & Exchange Commission).

Fixing capitalism

Invest America

• "Invest America": Brad thinks America should give $2,000 to every child born in America, and make everybody part of the ownership society. One of the main challenges with the current state of capitalism is that many are not owners so they do not grow with the expansion of the economy.
• There needs to be a concrete way to show people the power of compounding interest.
• Putting a plan into action: It's better to spend 10 million building a pilot program than lobbying congress. $1M for engineers to build the platform, $9M to seed the program, and give out 4,500 accounts of $2K to demonstrate effectiveness.

"It's our responsibility to acknowledge that probably more than half of the citizens of this country feel totally disenfranchised and disconnected to the ownership society. When they're being shot in the street, if they have no investment account, what does CNBC have to do with them? So, if we are going to use capitalism as a force for good, those of us who have platforms, that have ability to leverage our relationships [need to do more]. We need to be clear about this, we're not doing good enough." - Brad Gerstner

The Board Challenge

• Brad launched The Board Challenge in 2020: a pledge for U.S. boards of directors to add a Black director within a year (Companies involved include, Gusto, Nextdoor, Zillow & many more).

"I encourage everybody to read the Gates Foundation 2021 annual letter. Bill Gates is no Ayn Rand capitalist, but Bill Gates understands that the prosperity that exists in the world [because of capitalism]. I'm not talking about wealth of the rich people, I'm talking about mothers who are not dying in childbirth, people educated, and vaccines developed in record time." - Brad Gerstner

• Estimates suggest that the multi-trillion-dollar stimulus bill includes $1-$300B of just pure fluff. That alone could finance this program for 100 years.

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