This interview is excerpted from a TabbFORUM Series sponsored by UBS, "Conversations with Charlie Rose: The New Capitalists Shaping Our World."
What was your plan back when you started your firm?
There were three basic strategies. One was to specialize—most people do everything—in technology. Strategy Two was to invest in growth, not leverage—which is serving us very well right now, for a whole bunch of reasons. And Strategy Three was to have a set of skills that allowed us to transform the businesses that we invested in, rather than just be passive, financially oriented investors. Those are the three key strategies, which were at the time highly distinctive.
What was your first breakthrough?
The first deal that most people associate with Silver Lake was a company called Seagate (STX), a disk-drive company that was a big success for us. We also were involved with building a company called Ameritrade (AMTD). We've done a lot in the area at the intersection of financial services and technology, where we use technology in businesses that previously had a human-intermediation model. We helped put together the modern Nasdaq (NDAQ) stock market. And then the Skype transaction, which was announced recently.
What made Skype attractive to you? It didn't look like such a big deal when EBay (EBAY) owned it.
I think that mobile telephony, or broadband mobility, is potentially the largest investment opportunity of our lifetimes. Rough numbers: There are 5 billion subscriptions to handsets today, 4 billion devices. We're 25 to 30 years into the PC trend and there's only a billion PCs in use. There are low-single-digit billion bank accounts, TV sets, credit cards. These are some of the largest consumer markets ever developed. But 4 billion handsets. Why can't you make a phone call in New York? Because it's like everybody is trying to get on the FDR Drive at one time. Everybody wants to be on the network. These devices that we use now are increasing the data that go across the network by 10, 15, and 20 times, which means that the use of networks is at least doubling every year. We're in an economy in which people are worried about whether it's going to be 1½ or 2 percent growth, and you've got a part of the world that's doubling every year.
When you scout tech deals today, what are you looking for?
Well, we do like to be able to make money. Individual stocks are increasingly correlating with the markets themselves. It's very hard these days for, say, mutual funds to beat their indexes. So we look for companies that can grow in a secular rather than cyclical way; in other words, they're not going up and down with either the stock market or the economy. The iPad, I've been told, is the most successful electronics consumer product ever. Together with the iPhone, those came out during a financial crisis, and they've just burned right through the economic doldrums. A second thing is the ability to do something about your success. The private equity business model has many strengths, but one of them is the aspect of control. So you can go into a company and compel change that has a kind of urgency about it. When we invest in a company, [we look for] something fundamental we can change about the business to make it better.
Where are we now on the road to economic recovery, and what stands in our way?
It's going to take a good long time, and there's no substitute for just slogging it through—diet and exercise. We have to get the housing pig through the national python. We've got just far, far too many houses. My general thinking is that there are about two years' worth of excess supply of houses. The second thing is you have to heal balance sheets—mostly household balance sheets but also the government's, which I'll come back to. The third thing is the factory sector has to get back on its feet. We've gotten back to about 75 percent of capacity, but it needs to be somewhere in the low 80s in order for us to start rebuilding. And the fourth thing—which I think is by far the most important, because the marketplace and individuals are taking care of most of the others—is getting the government's house in order with a long-term binding plan to balance the budget, or at least reduce debt as a percentage of GDP.
Is this a good time to start a private equity firm?
I think it's always a good time to be an entrepreneur, because there's always entrepreneurial activity. The thing I worry about is that private equity is now 25 years into its life cycle. If I was a young person, I'm not sure I'd think about going into private equity.
Watch Charlie Rose on Bloomberg TV weeknights at 8 p.m. and 10 p.m.