But those are signals to us that show us that this latest trend, at least that we're seeing with AI, all of the aspects that are going to come through that and filter down into some of the software applications, et cetera, are showing no real signs of slowing down. And then, you look at usage statistics, things like the number of tokens that have been used.

Brian Dally: This isn't a case where a lot of money is being spent and the users are not using the product and people are trying to spend more money to get them to use the product. It's actually kind of the [00:02:00] other way around.

Ray Yousefian: Correct. And the other thing that I think that is unique and different about where we've seen investment like this before, and some people like to refer to the dot-com bubble, et cetera, a lot of that investment was really strictly coming through VCs, and VCs are funding a lot of these next gen companies that are taking advantage of this. But the CapEx dollars are coming from large cash flowing businesses and out of the free cash flows of Amazon, Google, Microsoft, Oracle, et cetera.

Brian Dally: Yeah. It's significant. You've worked across public and private markets, so this has got to be interesting for you. Do you think there's a difference between what's happening in, say, public equities and private credit?

Are they independent? Are they related? Is one in a better spot than the other from some perspective? How would you compare them?

Ray Yousefian: Yeah. So, [00:03:00] look, there's a bit of volatility in both of the asset classes right now. And I would say that the one consistent underlying theme that you're seeing where there's been some pressure is really around this whole question of, okay, if we were to take the software sector as an example of this, what is going to happen to the terminal value of those software companies, right?

And you're seeing that play out in the equity markets. Now, on the same token, that's a place of pressure for the equity markets, but then you have semiconductors, you have the fabs, you have everybody else that's trading up tremendously as they prepared for these next build-out cycles. And typically, it's the application layer, so the software companies, that then benefit from that further down the line.

But then there's this threat of AI. How much is it going to take over? Is everybody just going [00:04:00] to be vibe coding their way to software nirvana, right? And that, I think, is also where you've then seen some of the pullback in the credit markets, whereby some of these software businesses may have been over-levered, either through buyout transactions, or themselves took on a little bit more debt than what was perceived to be healthy, and you see that playing out in real time in pressure within that market.

Brian Dally: Sure. And if the cash flows aren't what people were forecasting, and debt was raised because maybe you have a disagreement about valuation or concern about dilution, it's pretty easy to picture how some sectors, especially in private companies, can't really tap public equity. But they can certainly... there's plenty of public debt or private debt [00:05:00] out there to tap into, and it sounds like that's the formula that's gotten us into that situation, right? They refer to it by funny names like the SaaSpocalypse. Oh, it's a funny name, everybody. It's pithy.

So it sounds like when it comes to that dynamic, there is a dynamic between public and private. Obviously, today you're very active on the private side. Do you think what happens in public equities, as we watch the stock market, the S&P 500, people are looking at their 401(k), which is for the most part probably indexed into something like the S&P 500 or the total market index. Should people expect real differences between what happens with the two, and how do they think about that? How do you think about that?

Ray Yousefian: To be clear, yes, there's softness maybe in pockets of that market, but overall, I think that there's [00:06:00] enough cushion in the system for both of those markets to remain healthy, absent some more of these significant dislocating events like a war in Iran. Or some of these macro events that are very difficult to prognosticate or predict. Okay? But the real difference between those two markets, and it can work for your investors depending on what their goals are, is that if you're in an equity fund or whatever, you're going to be getting returned, historically, 6% to 8%, compounding. And then, if you transition into private credit markets, maybe it's that same 6% to 8%, but you're trying to get a cash pay or a cash yield or something like that, on top of it. And the equity is a bit more of a compounding feature, and then the private credit is an income feature.

Brian Dally: Yep. I get it. [00:07:00] Thanks for that. I appreciate it. I want to turn to our partnership. Groundfloor's mission is around expanding access to private markets. When you think about our partnership, how does it align with what Serengeti is trying to accomplish? And what does it mean for the investors on our platform who are going to be checking this out?

Ray Yousefian: Sure. Well, first of all, love the mission, and we're so happy to be partnering with you, and thank you and your investors for investing in the Big Cat Fund. We're thrilled. Look, I think there's a lot of alignment on what we're trying to achieve. Love the fact that we could bring something like a stock finance solution to your investor base. And then with that capital, turn around and actually help out the real economy by getting that capital into the hands of our counterparties that need that capital. And this is just a better solution [00:08:00] for them, to be able to live their lives and continue on and continue adding value in these late-stage private behemoths.

Brian Dally: When you put money into this, it's actually coming back into the economy.

Ray Yousefian: 100%. For the most part.

Brian Dally: Interesting. I like that.

Ray Yousefian: And the other thing, and we didn't get a chance to really talk about this in the last session, but I do think it's important to maybe draw a parallel between our return profile and then direct equity investment the private markets. And like I was saying before, with our instrument, we'll be able to outperform a direct investor in the last round or buying in the secondary market, right? From when you have an exit that's down 70%, all the way up until the company doubles in value because of that dual return mechanism [00:09:00] that I was talking about with the pick and the stock fee. Now, our return line still goes up and to the right after the company doubles in value, but it's just a shallower line than if you were direct equity.

Brian Dally: That's where you're giving up some of the upside in order to have this downside protection.

Ray Yousefian: In order to have the downside protection. And then if I were to paint that into what's happened historically over the last decade in terms of late-stage growth exits. Okay. We ran this analysis, and then this was also an aha moment for us when we were just like... From an investor perspective, this is such a unique way to access this market.

And if you look at the average IPO value relative to the last round of these companies that have gone public over the last 10 years, two-thirds of the time they are [00:10:00] exiting at a valuation that is two times the last round or below. So when you then take that knowledge and apply it to the structure, that we're doing two-thirds of the time, you're falling right into the sweet spot of where these things are likely to perform.

Brian Dally: I think that's a really interesting point. I'm glad you circled back to that. I think that's really cool. You guys are very innovative. You obviously have your finger on the pulse of some interesting markets. Is there anything on the horizon that you can share that's next for Serengeti?

Ray Yousefian: I think I mentioned our founder, Jody LaNasa, at the very beginning of the podcast. And, look, his mind's always working. Our mind is always working. Just to highlight very quickly some of the other things that we are involved with now that will continue to evolve is, we do have some exposure and a strategy [00:11:00] for direct lending. That is, we call it, ARR, but it's really kind of like looking at contracted cash flows and being able to offer some financing against those contracted cash flows.

Brian Dally: So would you consider that revenue-based financing, or is it more earnings, like cash flow earnings, net or gross?

Ray Yousefian: It's a combination of both, depending on the situation that we're trying to bridge, or help out. There's definitely special situations, going back to what we were talking about before, that occur all the time whereby we're trying to help finance a business to a particular outcome. And that pops up all the time.

We also have a Litigation Finance Fund that my colleague AJ Martinez runs, and does a fantastic job of that. And then we also have a business that is supplying credit to, call it the critical technologies as identified [00:12:00] by the Department of War and military applications, and we're trying to help finance those businesses get larger and better so that they can better serve our government.

Brian Dally: Such an interesting roadmap. I love it. That sounds like a really fun sandbox to play in. All right, let's wrap up with a rapid fire Q&A. If you can, see if we can answer these in one sentence. Just give it a little shot. What is the most misunderstood concept in investing?

Ray Yousefian: That there is not a way to limit your downside and still capture upside. I don't think that you need to increase your risk to create a higher return.

Brian Dally: Ah, good. What's one market signal you never ignore?

Ray Yousefian: Interest rates.

Brian Dally: Oh, there it is. Interest rates. Biggest mistake you see investors making right now?[00:13:00]

Ray Yousefian: Not paying attention to the usage signals, and also the amount of investment that is coming from these large behemoth cash flowing businesses into this next era of technology.

Brian Dally: Yeah. Okay. I love that. Equity or credit? If you had to pick one for the next five years, which would it be?

Ray Yousefian: Ooh, interesting. I mean, there's pockets of both that are really great. I'm going to go ahead and say, opportunistic credit.

Brian Dally: Opportunistic. I like it. That's the hybrid. A little slice of the equity upside, but credit. Let the record reflect you picked credit. A deal you passed on that you still think about?

Ray Yousefian: Oh, God. There's quite a few of these. Not necessarily direct, but I remember about 12 [00:14:00] years ago, as everybody knows, I had a cousin that was talking to me about digital currencies and, "Oh, hey, wouldn't it be great if you could go ahead and transact in some of these things?"

And he goes, "Hey, there's this thing called Bitcoin. You really should invest in it."

And at the time I was kind of scratching my head, like, "Oh, no, no."

Brian Dally: So you backed up the truck.

Ray Yousefian: Yeah. Exactly. But, sort of missed that when it was like $30 a Bitcoin.

Brian Dally: Wow. I hope your cousin got on that.

Ray Yousefian: He's fine.

Brian Dally: Good. Perfect. And finally, if you weren't in finance, what would you be doing?

Ray Yousefian: That's a great question. Well, what would I want to be doing? I'd be playing in a band. I'd be playing acoustic guitar.

Brian Dally: You have an instrument?

Ray Yousefian: Yeah, I play a little acoustic guitar.

Brian Dally: All right. Solid. That's a fun lifestyle choice. I like it. All right, so let's wrap up now. [00:15:00] I really want to thank you for joining us on the Beyond the Stock Market podcast. For our audience, you can visit serengeti-am.com to learn more about Ray's firm. And we're going to share his LinkedIn profile in the show notes so you can see what he's up to there on LinkedIn in publishing and learn more about him.

You can check out all of our podcast episodes on groundfloor.com/podcast, and I just want to thank everybody for tuning in.