This is a fun topic these days… what’s going on? It seems like every place you look there should be bad economic news – there’s a war that keeps reigniting and impacting the price of oil, inflation that doesn’t seem to be heading toward the “magic” number of 2%, mortgage rates that remain high (unless you’ve been alive long enough to think they are reasonable) and AI that scares people, especially those attending college or recent graduates. Yet the stock market keeps going up and the unemployment rate keeps going down. Huh?!?
So what are we seeing from the cheap seats of private equity? Let’s start with employment. What we saw taking place three years ago when every level of employee could jump from job to job while receiving a promotion and a raise is over. It’s not easy to hire great talent and it may never be, but there is plenty of good talent available and expectations are reasonable (or even subdued). When we are looking for people at our companies, the positions get filled by good candidates at wages that seem fair. Right now, this doesn’t feel like a tight (or even tightening) labor market.
One of the reasons that the labor market probably doesn’t feel tight is because significant portions of the economy aren’t very exciting. If your business is directly or indirectly tied to construction, it feels alright but unexciting. If you are exposed to the consumer, it feels the same way. You can go industry by industry and feel like things are just fine. Performance and expectations aren’t bad – they’re just not exciting. Then, there are the lucky ones…
Every aspect of the defense industry feels like it’s ramping up. Companies exposed to defense directly or indirectly are being asked to ramp production materially over the next three years. It’s clear that decades of geopolitical stability are behind us and countries are rearming.
Then, there is the other driver: AI. Taking a quick step back, I want to put a few things about AI in perspective. ChatGPT was the fastest consumer app to reach 100 million users – it did this in 2 months. Anthropic has had the fastest revenue growth by run-rate of any software company ever, going from $1 billion in revenue in 2024 to an estimated run-rate of $47 billion in May of this year. If anyone questions the desire of people to use AI and the impact it’s going to have, look no further than the speed of growth for these two businesses. AI is coming. It will transform business and no one really knows how. We just know it will.
At ORG we are seeing every business that touches AI, including the datacenters related to AI, booming. This is trickling though multiple industries as these massive companies with significant access to capital build a new utility that will transform the future. Like other revolutionary tools, this is going to be messy. There will be excitement and disappointment. There will be booms and busts. But when it is over, AI will be used by every company. So if you are lucky enough to have a business that serves that market, you are feeling very good right now and I personally don’t see it ending soon. I won’t speculate on the speed or duration of this, but it is a huge buildout on par with other massive innovations (think telecom, wireless, cable systems, etc.). In all of those instances, tremendous sums of money were spent. Some companies succeeded and some companies failed. The winners consolidated the smaller businesses and the business models evolved. I might be a dinosaur, but tokens don’t do anything for me. Conceptually I think they’re pretty dumb and will be hard to sell to consumers. That said, I honestly believe that this is because we’re still in the infancy of this business model and how we’re going to pay for it. It feels a lot to me when wireless companies used to charge per text. As the costs came down it just became part of your data plan. Do they even have data plans anymore?!?
So, this is what I see. Most industries are simply doing ok. Because of this, the labor market is fine. Most companies aren’t experiencing meaningful growth so they aren’t aggressively hiring. (Shameless plug: those companies should partner with ORG so we can help them grow!) Then there are the companies with exposure to Defense and AI (including datacenters). These businesses are experiencing ramps that are exciting and challenging. And this is all occurring with both interest rates and inflation that aren’t going down…but maybe I’ll talk about those in my next blog!