Recognize co-founder: ‘Talent and inflation’ are companies' top priorities

Recognize Managing Partner and Co-Founder Charles Phillips joins Yahoo Finance Live to discuss how the Russian attack is affecting tech talent in Ukraine, volatility in the tech sector, and companies' top concerns.

Video Transcript

JULIE HYMAN: Well, Russia's invasion into Ukraine has been causing ripple effects across the globe, as we have talked a lot about. What about business actually in Ukraine? I want to bring in someone who has experience in that area, as well as broad experience in tech investing. That is Charles Phillips. He's managing partner and co-founder of Recognize.

And Charles, there's a lot I want to talk to you about. But I think we do have to start with Ukraine because your first investment as part of this newest venture of yours is called [INAUDIBLE]. It is a cloud native digital engineering firm. And it's got a big presence in Ukraine. So what are you hearing from your employees? And what do you see the company do in a situation like this?

CHARLES PHILLIPS: Yeah, good morning. As you can imagine, it's a pretty complex situation. And so [INAUDIBLE] is technically headquartered in London, which is where the CEO and the CFO are. But you're correct. There's about 3,000 engineers, software engineers on the ground in the Ukraine. And I've been over there in the fall and October. One of my partners just returned from there. And we're doing daily calls with people on the ground there. And so I think near term is the safety of all the people. That's our biggest concern.

And we're moving people to areas that are easiest and most logical to go to-- Bulgaria and Poland. We're able to get visas. In some cases, you don't need visas. But more importantly, I think we're looking at what's the long-term trajectory of the business as well. How can we preserve those jobs in the business and help people transition? And these are very resilient people. For people who don't know Ukraine, it's a very fertile area for software engineers. The Russian Space program used to be there for years. And so they're great engineers. Many IPOs have come out of there, out of the Ukraine-based engineering.

And so we're moving some work to other locations. This is software development on the internet, and it's cloud based, so it's somewhat easy to move work around the globe. So that's another option we're looking at right now. The clients have been fantastic. They want to support all the Ukrainian companies in the tech sector for a lot of different reasons. And so we're working through it as we speak. And obviously, it's an unusual time period.

JULIE HYMAN: It is a very unusual time period. And it's also a sort of very early in this unusual time period. It still feels like we don't know what's going to happen in the coming days, weeks, months. And so under that situation, do you operate under the assumption that these folks are going to have to be outside of Ukraine for some period of time and that you have to set up sort of alternative infrastructure?

CHARLES PHILLIPS: Yes, some people will be outside of Ukraine. Not everyone wanted to move and different reasons. People have allegiances to the Ukraine. They have family there. They own homes. Some have extended family. So not everyone can leave. But for the people who are, we are arranging for them to kind of have a long-term stay, if need be. And we're funding that and bringing their families as well. So who knows how long this will last and when they can return if they can return. So we will figure it out week by week as things change.

BRIAN SOZZI: You sit on some very prominent boards. I think we've shown on the graphic, Viacom, CBS, and American Express, just very large companies known around the world. What are some of the biggest challenges inside the boardrooms of these very big companies outside of the situation going on between Russia and Ukraine?

CHARLES PHILLIPS: So ViacomCBS is, of course, now Paramount, so just get that out there, their name. I would say it's less impactful for some of those companies, although you'd be surprised at how many companies have contractors who are based in the Ukraine because you have to go where the talent is, whether it's India, the Ukraine, or Czech Republic. So that's not unusual. But it's not a material event for them.

The more prominent issue for the larger companies right now is just talent and inflation. So those are two things they're dealing with. It's more expensive to hire people. Even if you can't hire them, it's hard to retain them. And some of them don't want to work, come back to work yet. So it's that whole talent inflation issue.

JULIE HYMAN: And, you know, this is a good, I think, companion conversation to the one we were just having with Elizabeth Craine of Moelis a few moments ago because we were talking about the M&A environment right now, and I think we can also talk about the sort of VC and tech investing environment, from your perspective, how it's being affected by talent inflation and also market volatility. And so I'm curious, as you're looking for new investing opportunities, how all of that is playing in. Is it tougher right now to find those opportunities?

CHARLES PHILLIPS: Well, I would say there's a disconnect between the public markets and the private markets. As the public markets have gotten more volatile because of inflation, it takes longer for the private markets to adjust to that. And sometimes it doesn't happen. Right now, I would say the valuations are still pretty solid, holding up well. And we're finding companies, but it's still competitive.

We have a pretty big sourcing engine between myself and one of my co-founders, Frank D'Souza, former CEO of Cognizant. We've had almost a couple of million people work for us over the last two decades, so we have a pretty good sourcing network. There's not a lack of companies to look at, but the competition on the valuation is still significant right now.

And all of these private equity funds have plenty of cash. As you know, they had a banner year last year. Over almost 4,000 exits last year, the distributions were phenomenal. So they're all raising even more capital this year. And so all that capital floating around in the private markets makes valuations still at a premium.

JULIE HYMAN: And that's so fascinating to me because, obviously, then, we're seeing sort of a disconnect, right, from what's happening in public markets. Is that something that is typical? And how long do you think that that can persist?

CHARLES PHILLIPS: It is typical that the two markets can diverge for some period of time. Remember, most exits today in private equity aren't to the IPO market. They're to other strategics. They're to other private equity firms. So it's a somewhat contained market, and some portion of that, in a way. So those valuations can stay there for a while. If this continues, though, the same trends that are affecting the public market, i.e. higher talent cost, inflation, and to some extent, a tougher IPO market, starts to seep in over time.

JULIE HYMAN: Charles, finally, I want to ask you because it's still Black History Month here, although, obviously, we like to talk about these issues all the time, you have found something called the Black Economic Alliance. And I guess what I'm curious about is, we're sort of now some months from the height of attention on diversity, on Black Lives Matter, et cetera. What are the conversations that you're having right now? Is it still sort of front of mind for people? And do you think that we're sort of moving the needle in the correct direction?

CHARLES PHILLIPS: It may not be as prominent in the news because there's been no visible event like that had happened. But I would say it's still certainly a prominent topic in boardrooms, and companies have continued to try to make progress. And this year, I've been encouraged by that, actually. And so one of the most visible efforts that I've been involved in, along with [INAUDIBLE] from American Express and Ken Frazier from Merck, is a project called 110, hiring one million Black people over the next 10 years.

And we have about 62 companies that have committed to helping fund that and doing that and hiring people. But more importantly, they're hiring people who don't have college degrees. So that's the issue. Something like 75% of Black people do not have a college degree. And so if you don't include them, you're not really moving the needle. So we're getting them other skills training for them to participate. And the companies are actually doing that commiting and hiring people right now.

So, on that one project, it's been about 25,000 people hired under that program in the last four months. And so we are, of course, tracking that, the commitments that they've made. The companies want to do the right thing. And by the way, they have a shortage of talent, as we've talked about earlier. So they need to do this anyway. This is good for business. This is not just some social program for them. This is something they need to do to kind of fill those open slots.

JULIE HYMAN: Charles, really fascinating there. And we got to leave it there, but I do want to follow up with you and talk with you more about that issue in particular. There's just too much to talk to you about. Charles Phillips, thank you so much, managing partner and co-founder of Recognize. Appreciate your time this morning.