Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Alan Waxman
[00:00:00] S0: You said before that maybe System 3 could be the Goldilocks scenario. I was always interested around financial crises and moral hazard as a topic, and the socialization or spreading of this risk that one person takes to make more money, and they'll be bailed out or something like this. It seems like this mismatch – this asset-liability mismatch – is something that in the current system – maybe it's cyclical and it waxes and wanes – but selfish people are going to take advantage of the ability to raise more money forever, unless the responsibility is mandated or regulated or more clearly laid out. Do you think we have some evolution still to do to create the Goldilocks scenario? [00:00:00] S1: I think that's what really needs to be thought about. I think that's going to happen as part of this recalibration process, but that is a much better outcome. There can be good legislation, but there's a risk that it's not the right guardrail and it's not good for competitiveness and it creates the next crisis. The best answer is a market mechanism, like you have with institutional investors, where if you do irresponsible things or you're not a good investor, if you change your business model, they're going to punish you by not giving you money for your next fund.
· Alan Waxman, Patrick O'Shaughnessy
[00:00:00] S1: I think that's what really needs to be thought about. I think that's going to happen as part of this recalibration process, but that is a much better outcome. There can be good legislation, but there's a risk that it's not the right guardrail and it's not good for competitiveness and it creates the next crisis. The best answer is a market mechanism, like you have with institutional investors, where if you do irresponsible things or you're not a good investor, if you change your business model, they're going to punish you by not giving you money for your next fund. [00:00:00] S0: If I turn all of this into ideas or guidelines for people running investment firms or who want to launch an investment firm or something, what are the right principles to take away? Obviously, one is keep your liabilities and your assets well matched. That's a major one that anyone can do and maybe you have to work a little harder to raise money, but you'll be thankful for it. A second is maintain an underwriting standard that's extraordinary or however you want to define it. Any other major advice that you'd give to people running investment firms, or just principles you have from building Sixth Street that flow from all this history and thinking?
· Alan Waxman
[00:00:00] S1: First, what's your clarity of purpose? What's your day one clarity of purpose? Does that say consistent over time? Is your clarity of purpose to raise a bunch of liabilities or is it to drive good returns for investors? Maybe it's both. Maybe you can do that. Maybe some firms can do that. But, what is your clarity of purpose is something we talk a lot about at Sixth Street, is that if you look at all the great companies that have been around for a long time, they got one thing right. They never forgot what their purpose was, which is to serve their customers. It's enticing to raise a bunch of money. It's enticing once you raise it to invest a lot of money. That doesn't mean that you have to do it. Sixth Street, we're a multi-strategy private capital firm. We do a bunch of things. One of the things we do is direct lending. We have one of the best track records. We've been here longer than – in direct lending, I started the direct lending business in 2001 when there was only two of us. So we've watched this and we could have gone to the wealth channel and raised all the same vehicles because of our track record. And we have – you know how many dollars of perpetual private BDCs we have? Exactly zero. It's not that we couldn't have. We just didn't think it was the right thing and we didn't think it was consistent with our clarity of purpose, and that's why we didn't do it. It's easy to get FOMO. I just think you just got to block out that noise and it always comes back to first principles of clarity of purpose. What are your values? And if you stay consistent with that, judging by the best companies that have been around for a long time, that's your pathway to building a great company that's going to be here for a long time, not short-termism.
· Patrick O'Shaughnessy
[00:00:00] S0: Again, back to the news cycle. There's this thing of firms that manage lots of private credit strategies, SMA exposure, et cetera. Some of their stock prices are really hurting and we've talked about all the reasons ad nauseam for the mismatch, et cetera. What do you think happens in private credit land?
· Alan Waxman
[00:00:00] S1: I think and hope that this is going to be a recalibration. People are going to re-adopt more prudent underwriting. I think people in the industry will change behaviors. And by the way, in some cases, the market will change your behaviors because you may not be able to raise more capital. So the market mechanism I think will work. And then obviously, and this is a hopeful, I think it'll stabilize, and hopefully the best thing about the current moment is that this happened not in a deep recession. It happened when the economy is pretty relatively healthy. I mean, there's definitely risk out there to be worried about, but this would be a much different – if you think about redemptions on a lot of these wealth vehicles, if it were a distressed environment, the redemptions would be 2-3x what they are. So to me, this is a gift to the industry to recalibrate. And there's a lot of smart people in our industry, a lot of great investors. And I think the industry will recalibrate. And then if you think, stepping back from the American financial system, commercial banks, You could have a really powerful system supporting economic growth with commercial banks providing one pillar – safer, good guardrails – and private capital providing the risk capital. That's a pretty good system. And I think if we get that right, it's really going to set up America to be really optimized for economic growth. That's what I'm hopeful about.
· Patrick O'Shaughnessy, Alan Waxman
[00:00:00] S0: You alluded to AI and software being one of the early dominoes that got this whole discussion rolling, and people's redemptions and reactions and things. It seems like, if you think about creative destruction as a force driving the US experiment since its inception – talk about facing a tiger. We are facing a hardcore period of creative destruction. How do you think about that, given the open, wide mandate of Sixth Street, your ability to go put your capital and your customers' capital in so many different places? Just talk to me about the opportunity set today. Of course, I want to hear what you think about like AI and software, I can't help myself. This just feels like such a time to be alive, but also opportunity and danger. [00:00:00] S1: There's lots of opportunity. I live on the LLMs. I play with them. Actually, my wife makes fun of me because I'm constantly playing with my friend Claude or my friend Chat or my friend Gemini. [00:00:00] S0: Not your friend Grok?