Biggest LBO Ever, SPAC 2.0, Open Source AI Models, State AI Regulation Frenzy

The episode opens with the host, transcribed as Jason Kallikanis, introducing the panel: a "chairman dictator" and "the sultan of science, David Freeburg." David Sachs is said to be calling in from a "skift" while in "some deep negotiations for The United States Of America." The panel jokes about the word's spelling ("there's no t at the end") and about what Sachs might be doing there.

A mention that Pete Heggs (as transcribed) has announced a PT and fitness test for generals turns into banter about whether Sachs could pass one and a proposed push-up contest. One participant argues results should be adjusted for height and limb length, saying "20 for me is much harder than 20 for you, Jason," and the exchange continues with jokes about Bilbo Baggins, Thor and a "Daniel Craig era" before the host steers back to the first topic.

The main topic is Electronic Arts being taken private in what the host calls "the largest take private deal in history," at $55 billion. For scale, the host compares it with a Texas power company deal (the date is transcribed as "02/2007") and HCA Healthcare at $33 billion. The investors named are Saudi Arabia's PIF, Silver Lake, and Jared Kushner's Affinity Partners, which the host calls a "friend of the pod."

Deal and company details given in the discussion: - Price of $210 a share, described as a "25 premium on the stock". - The Saudi PIF is described as Kushner's largest LP in Affinity, and as having invested "over $900,000,000,000" in holdings including Lucid Motors, LIV Golf, the SoftBank Vision Fund, Uber "back in the day" and Newcastle in the Premier League. - EA was founded at Sequoia's office in 1982, and its headquarters is still in Redwood City. Franchises named include Madden NFL, The Sims and Need for Speed. - The host says the PIF "loves games," calls it the biggest shareholder in Nintendo, and names Savvy Games and Scopely.

The host calls the deal "a high watermark for private equity anyway you look at it" and asks Chamath for a view. The claim that the PIF is Nintendo's biggest shareholder is not reconciled with a later figure in the same discussion, which puts Saudi ownership of Nintendo at 4%.

The first response backs the deal ("I really like it") and sets out both sides. The bull case starts from the claim that "video games is the anchor pillar of usage across the entire Internet." The evidence offered is a statistic from a dinner at the speaker's poker game, attended by Unity CEO Matt Bromberg and COO Alex Blum: about 3 billion daily active users play games (transcribed as "3,000,000,000 DAO play games"). On that basis the speaker calls gaming "much bigger than social networking and social media or as big," with EA as "this 800 pound gorilla."

The risk named is distribution gatekeepers, specifically Microsoft and Xbox. The speaker says that roughly the day after the EA deal was announced, Xbox raised its subscription price by 50%, and that so many people then tried to cancel that "the site went down." The speaker reads this as gatekeepers "trying to raise prices and take share" while IP owners have lacked "a well funded way of fighting back."

In this argument, going private gives EA time to "clean up the OpEx model," adopt "the best of all these next gen tools," and find distribution "outside the scope of Xbox and PlayStation." If it does those things, the speaker says, "this is a multi $100,000,000,000 asset."

The bear case extends an argument the speaker has made on the show before: "the value of patents and by extension IP and copyrights are going to go away." The speaker expects some IP holders to win and others to lose, places gaming "on the winning side" and traditional studios such as Disney, Hulu and Netflix "on the losing side." The real downside scenario is that AI tool chains increase the number of games built "by two, three, four orders of magnitude" and that social media sites end up distributing them. The speaker calls this "a pretty low probability" and concludes that "Jared and Egon did a killer deal."

The host adds that Unity makes the 3D software games are built in, is a public company valued at $16 billion, and was backed early by Rulof Botha's Sequoia (transcribed as "Ruloff").

Asked to compare gaming, social media and traditional media for millennials and younger audiences, a participant frames the question as one of time spent, and specifically which category AI will push more hours toward. The thesis is that "AI is gonna ultimately accrue to video game entertainment far more than social media entertainment or traditional media," because games can offer "dynamic, more engaging experiences" built on back-and-forth interaction.

The concrete example is Fortnite. The speaker says that new players who think they are playing other people are "mostly playing against AI," tuned to be easier to beat. Their account is that churn had been high because first-time players were matched against better players, "would never win," and quit, and that AI opponents raised engagement and retention. The speaker says this now happens on "a lot of different gaming platforms."

The speaker then offers a broader investment thesis, which they suggest "everyone should consider making": if AI raises productivity, people in the industrialized world will have more free time and can support themselves through "the deflationary effects of AI over time," so the entertainment market grows. The argument runs as a chain: "gaming is the future of entertainment, and the future of gaming is AI." The speaker presents this as their own view of what the Saudis saw while diversifying away from oil.

Saudi gaming holdings as listed: - About 10% of EA before the deal. - Through the Savvy Games division, Scopely for $4.9 billion in 2023, and Niantic, maker of Pokemon GO, for $3.5 billion "earlier this year." - 4% of Nintendo, 6% of Take Two, and "a sizable percent" of Activision Blizzard. - After the transaction, Affinity is expected to own about 5% of EA, with the Saudis as majority owners.

The speaker expects EA to become the Saudis' "next big platform play." Private ownership, in this view, lets them invest in the AI transition without worrying about "quarter to quarter earnings," making "a ten year bet" tied to their 2030 vision.

Weekly usage figures for US adults are given for the three categories: about 60% play video games, about 75% use social media, and 83% use streaming and traditional media such as Netflix and Disney+. Books and going to the movies are called "obviously the big losers."

A participant says "the market was totally getting this wrong" and describes the financing as roughly $36 billion of equity and $20 billion of debt. According to this account, the dealmakers called Jamie Diamond (as transcribed), who committed the $20 billion the same day, which the speaker guesses was possible because the deal could be underwritten quickly. The general lesson drawn is that "some of the biggest deals are frankly so obvious that it just takes the courage to put it together." CEO Andrew Wilson is staying on and is described as "a great guy."

The host says they will be in Saudi Arabia and Dubai in November for their founding university and have visited about twice a year for roughly three years. In their telling, officials in Doha, Abu Dhabi and Riyadh name the same six or seven priority industries: technology, private equity, live entertainment and sports, hospitality, and real estate. A chart is cited putting private equity at about $5 trillion, an industry that has roughly tripled since 2015.

I I think private equity's totally screwed. I I don't think Silver Lake or Affinity or this deal are screwed, but I think private equity in general is totally owes.

The host asks why private equity is growing and what it means for ordinary savers if companies such as EA, Stripe or SpaceX are not available in retirement accounts.

The reply gives a history. Investors long relied on a "sixty forty allocation" (as transcribed, "60% to bonds and 40% to equities") to get the best risk-adjusted return through downturns and volatility. When rates were "artificially suppressed" at zero "through Obama," allocations moved further out on the risk curve, mainly benefiting venture capital, private equity and hedge funds. With near-zero rates, private equity had "an infinite amount of borrowing capacity" and could "manufacture returns" faster than the other two.