Tech investor Sumit Gautam carefully avoids the word bubble when describing the investor frenzy surrounding the rise of artificial intelligence, but warns there are dangers of getting caught up in the hype drummed up by tech executives and venture capitalists around the emerging technology.
Tech companies leveraged to the AI boom have surged in the last couple of years, with investor groups ranging from the most sophisticated institutions to mum and dad investors pouring money in amid fears of missing out on the tech revolution.
AI poster child Nvidia’s share price has more than doubled this year alone, lifting the chip-maker's value to around $US2.8 trillion ($4.12 trillion), making it the third largest publicly traded company in the world after Apple and Microsoft.
Other tech giants, including Microsoft, Meta and Google owner Alphabet, are also riding the wave of investor demand, with double-digit share price growth since the start of the year.
While many analysts believe there is more growth to come, Gautam, who will be among the headline speakers at November’s Sohn Hearts & Minds investment conference in Adelaide, is more bearish about the ballooning valuations that have some fearing are a bubble waiting to burst.
“I would like to stay away from the word (bubble) but I would say that the pace of expectations and the amount of mind-share that AI has received in the last 18 months – it appears parabolic and capitalism does not like parabolic moves,” he says.
“I think AI is a theme, and everybody’s looking to invest in that theme. Our experience over the last decade-plus, both in the public market but before that private equity, is that investing in themes is usually not a good idea, because the way the fundamentals play out is very different than what you were investing in.
“Our experience always says that you want to invest in bottom-up evaluation of a company, and maybe the theme might help or might not help. We’re not trying to be predicting the future in any ways, but what we’re saying is that you’re better off taking things slow and letting it materialise with a relatively natural rate of growth, versus starting to have exponential growth, because exponential growth inevitably leads to crashes.”
After starting his career as a management consultant at McKinsey & Co, Gautam later worked at a tech start-up in Silicon Valley before moving into private equity at Bain and Audax Group, and later developed his tech investment specialisation while at $US1.3bn hedge fund Hirzel Capital.
In 2017 he launched Dallas-based Scalar Gauge Fund, a specialist platform that adopts a “private equity style of investing” to its holdings of predominantly US-listed software companies.
The fund has grown to around $US200m in assets under management, including a mix of passive investments and other companies where Gautam sees an opportunity to add value.
Described by some as an activist investor, Gautam prefers to focus on the “value creation” that comes with a more hands-on approach, including working closely with management to drive performance and at times pushing for board representation, as it recently has with billing software company Zuora.
“The way we think about this is as long as we are creating value, then the shareholders or the stakeholders will benefit from that value creation,” he says.
“We are focused on investing in undervalued, higher quality software companies in the public markets, but then we sometimes play a constructivist role in adding value to these companies, either just working with management, but also sometimes bringing in private equity to acquire these companies.
“So the claim to fame that we’ve had in the last seven years has been that 34 of our portfolio companies have been acquired, most of them by private equity.
“And 34 may not sound like a big number, but there’s only been about 60 public-to-private deals that have happened in this time frame in the space that we play in, in technology, so market share is more than 50 per cent.”
Indian-born Gautam studied engineering at the Indian Institute of Technology before moving to the US in the late 1990s for further studies at MIT.
He will not be drawn on his preferred candidate for the election in his adopted homeland, but says the US needs “more economic growth and we need to embrace more capitalism”.
While clearly a free marketeer, Gautam holds some concern over the rising power of the so-called Magnificent Seven tech giants.
Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla make up around a third of the S&P 500 index, and Scalar Gauge analysis suggests that based on growth rates over the past eight years the share they could reach two-thirds within the next decade. “Just by the nature of that power concentration, we don’t believe that society or the laws of economics will let that happen, because it’s just not a healthy place to be,” he said.
“If that’s not the case, which means that the historical returns are not going to be the same as future returns – if you believe that assertion, then you have to look elsewhere. The capitalistic way of thinking about it is that you’ll get new companies to challenge. There’s definitely a regulation aspect to it as well.
“In general, we like government to not be involved in the markets, because it’s generally inefficient. But we also can understand the reasons, that it has impact on society, impact on free speech – these companies have become a lot more influential.
“We have nothing against these companies. And they, of course, have done phenomenally well. But we don’t believe it’s healthy on a society, or on the information dissemination viewpoint, or from just the concentration of power in just one entity.”
Gautam will be among the headline speakers at this year’s Sohn event, which has raised $70m for medical research since its launch in 2016.
Attendees will hear stock tips and investment strategies from some of the world’s top fund managers, including Oaktree Capital co-founder Howard Marks, Sydney fund manager Alex Pollak, the founder of Loftus Peak, and Terra Capital founder and chief investment officer Jeremy Bond.
The Sohn Hearts & Minds conference will be held at Adelaide’s Festival Theatre on November 15.
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