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Invest Like the Best with Patrick O'Shaughnessy
Alan Waxman - Building Sixth Street - [Invest Like the Best, EP.433]
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- [00:01]
Patrick O'Shaughnessy
Something I speak about frequently on Invest like the Best is the idea of life's work. A more fun way to think about it is that I'm looking for Maniacs on a Mission. This is the basis for our investment firm Positive Sum, and it's the reason why I am so enthusiastic about our presenting sponsor, Ramp. Not only are the founders Karim and Eric Life's work level founders certainly maniacs on a mission, they have created a product that is effectively an unlock for founders and finance team to do more of their life's work. By streamlining financial operations, saving everyone their most precious resource time, Ramp has built a command and control system for corporate cards and expense management. You can issue cards, manage approvals, make vendor payments of all kinds, and even automate closing your books all in one place. Speaking from my own experience using Ramp for my business, the product is wildly intuitive, simplistic and makes life so much easier that you'll feel bad for any company who hasn't yet made the switch. The Ramp team is relentless and the product continues to evolve to save you time that you would never have dreamed of getting back. To me, there is nothing more interesting than technologies that reduce friction for other entrepreneurs to be able to build the thing that they want to so much attention has gone to cloud computing, APIs and other ways of making life easy for founders. What Ramp has done and is doing is build yet another set of tools in this category. To get started, go to ramp.com cards issued by Celtic bank and Sutton bank member FDIC. Terms and conditions apply. As an investor, gaining an edge means having the right tools and one platform leading the way is AlphaSense. Trusted by 75% of the world's top hedge funds, AlphaSense is the market intelligence platform that gives institutional investors access to over 500 million premium sources, from company filings in broker research to news, trade journals and more. And with its recent acquisition of Teagus, it also includes the world's largest library of expert interview transcripts, over 200,000 calls covering more than 24,000 public and private companies all in one platform. So investment teams can move faster, go deeper and make high conviction decisions with confidence. Now AlphaSense is transforming the research process with the launch of its Deep Research tool, part of the next generation of its AI powered platform. Unlike other deep research tools, AlphaSense's version is purpose built for investment research. It runs multi step iterative analysis using AlphaSense's proprietary content, including those 200,000 expert transcripts and in minutes surfaces insights that would take multiple interviews and days of digging to uncover. It's like adding 10 analysts to your team, helping you accelerate analysis, deepen understanding and make sharper decisions. See it in action@alphase sense.com Invest Ridgeline is hosting their annual Basecamp Conference this September 22nd through the 25th in Deer Valley, Utah. I will be there and sold over 50 top investment management firms from around the country. Now in its fourth year, Basecamp has become where the future of investment management is created. Ridgeline gets the most influential changemakers in the same room, learning and sharing ideas about the latest innovations that are drastically altering how this industry operates. It's truly a must attend event for anyone who wants to understand and be inspired by what's coming next for investment management. Again, I'll be there, but space is limited and attendance is curated. You can request an invitation by heading to ridgelineapps.com Ridgeline gets me so excited because every investment professional knows the core challenge that they solve. You love the core work of investing, but operational complexities eat up valuable time and energy. That's where Ridgeline comes in. It's an all in one operating system designed specifically for investment managers, and firms are flocking to Ridgeline for good reason. You don't have to put up with the juggling multiple legacy systems and spinning endless quarter ends compiling reports. Ridgeline has created a comprehensive cloud platform that handles everything in real time. Visit ridgelineapps.com to schedule a demo. Hello and welcome everyone. I'm Patrick o' Shaughnessy and this is Invest like the Best, this show is an open ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in depth profiles of the people shaping business and investing. You can find Colossus Review along with all of our podcasts@joincolasis.com.
- [04:09]
Alan Waxman
Patrick O' Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit Psum vc.
- [04:38]
Patrick O'Shaughnessy
My guest today is Alan Waxman. Alan is co founder and CEO of 63, one of the most unique investment firms with a go anywhere, do anything mandate across asset classes, geographies and time Horizons and over $110 billion in AUM. He describes his journey from CIO of Goldman Sachs Special Situations Group and the frameworks he brought with him to lay the foundation for 6th Street. Allan details their famous investments like Spotify and Airbnb during challenging periods, their innovative sports partnerships with Real Madrid and FC Barcelona, and their $30 billion Cal vehicle that allows them to write billion dollar checks while keeping individual fund sizes matched. Opportunities we discussed hiring people without egos, enabling a true multi strategy approach and 6th Street's face the tiger philosophy. Please enjoy this great conversation with Alan Waxman. All right. I don't know where to begin. This one, 6th street is so incredibly interesting in that it can do anything, it can go anywhere. It's extremely opportunistic, extremely flexible, open mandate. We'll talk a lot about the history and the different kinds of investing that you've done, but I think a fun place to begin would be for you to tell us about your Goldman days and specifically the group of people that you were investing with back then, which I've heard described by you and others as the Navy Seals or special forces of finance. Maybe describe that group in as much detail as you can and why it was so formative and impactful on you.
- [06:03]
Alan Waxman
It was lucky that I even got into that group. I met a guy on an airplane, basically I was an international relations major at Penn. No finance history, anything. Got out of school and I was basically working in the mailroom for a bond only management firm called Fisher, Francis Trees and Watts and was punching books. And all my friends, they all had jobs basically at Penn. I had 35 interviews, didn't have a job offer out of college. That's why I ended up in the mailroom. But I was always interested in companies. I just didn't know a lot about it because I didn't have a corporate finance background. I was on an airplane coming back from Texas, my home, and I met a guy on an airplane, this guy by the name of Jodi Lanasse. And I was just asking him a bunch of questions. I ask a lot of questions. My wife makes fun of me because I ask questions all the time. I go to dinner sometimes. People say, well, you asked me a thousand questions I didn't get a chance to ask you. That's just how I am. So I was on the airplane and this guy, Joe Donasso, who had started in this group, he was reading like research reports, like thousand miles per hour processing speeds I'd never even seen before. So I just started to ask him questions about what are you doing and what's your group? And we just started talking on the airplane he had came from Wachtel. My principal investing group at Goldman that literally is highly flexible, could really do anything, which by the way is the predecessor of the group that I was ultimately in. We ended up forming a relationship just because what I learned is the good thing about being curious as you know, is you build relationships, you learn a lot and it just creates opportunities. He ended up getting me an interview and I got into this group which ultimately became the special situations group at Goldman. That group was the largest principal investing business at Goldman. It was the firm's balance sheet at its peak. I think we're like $25 billion of the firm's balance sheet. Our mandate was to basically you could do anything. Different asset classes, different sectors, different geographies, different durations. So we could do stuff that were 2, 3 year investment horizon or 10 year investment horizon, different return profiles, some of us 10% return stuff, some was 20%, 30% return profits. Literally we could do anything, but we couldn't lose money. So what we learned at the time is this group, we were substantial amount of Goldmanson and income with a very small team for 10 plus years.
- [08:17]
Patrick O'Shaughnessy
What made that group tick? I'm curious about all aspects of it. The recruiting, the culture, the investing style, the low loss rates is really the.
- [08:27]
Alan Waxman
Ability to unitize risk reward across different asset classes, geographies, sectors, return profiles, duration profiles. Take a real estate type investment, compare it to a US corporate loan compared to buying a company, compared to starting a company. And we unitize risk units and return units. And we did that across a bunch of different sectors, a bunch of different geographies and asset classes. And just that skill, being able to do that, you constantly comparing relative risk units and return units and it gives you the ability to find the best risk reward at that time. And the key principle there, and we learned this the hard way. So if you go back, Goldman was a bunch of fiefdoms of principal investing business. There were 10 fiefdoms, different partners running investing businesses and none of them talked to each other. They all had their own balance sheets, never spoke to each other. So during 2001, 2002, a number of the businesses lost a lot of money. For example, we had in the U.S. the business I was in, which is a U.S. corporate investing business, was pretty negative on fiber builds. If you remember Exo Communications or Williams, remember all the fiber which was overbilled, all that. There was another group at Goldman who are great investors, but they were all in on fiber. Even though we were literally one floor apart One group lost a bunch of money and we were anti, we didn't lose money. And after that the firm basically said let's put all these disparate principal investing businesses. Again, we didn't have outside LPs put them all under one umbrella. And that ultimately became what was a special situations group, which became a substantial part of the firm's profitability.
- [10:02]
Patrick O'Shaughnessy
Can you say more about this notion of unitizing risk and return? The literal tactical way that that happened?
- [10:08]
Alan Waxman
So we think about the relationship of risk units and return units. So return units are easy, it's irr, it's duration, risk units are a lot harder. If you think about the two key variables of let's say evaluating any company or security, you basically got the cash flows, the volatility of the cash flows to the risk of the cash flows and growth. So the way we think about it, and again, this has been refined over 25 plus years. Our framework is basically take three things. First of all, what's the quality of the business, what's the quality of the sector? The second thing is where do you sit in the capital structure? What we would say is your attachment points. And the last thing is documents. We take that framework and we sort of run that framework through that across sectors, geographies and that's how we start to quantify risk units. So for example, if you take a consumer goods company, that's a buyout of a consumer goods company and let's say a private equity firm buys it for a 20% return, let's say they leverage 70%, you take a hyperscale data center that's got, let's say a 15 year take or pay contract with an investment grade counterparty, that's going to be a required lower return. So that'd be an example if you have a geography, let's say just as an extreme example, if you've got a 15% structured equity investment for a company, exact same company, exact same sector in Australia, if they were in Ukraine, you're probably going to demand higher than 15%. Let's say we're a minority equity investor in a company and one you've got, the control party can literally do whatever they want. They could dilute you, they can put a bunch of debt ahead of you. That's one set of risk units. If you've got traditional, hopefully good minority protections, that's another set of risk units. So we take all that, we do that across asset classes, sectors, geographies, durations. So some stuff like our capital, we can do stuff that's 10 to 12% returns. Some of our stuff is 20, 25%, two to three times your money. And our whole view of the world is, the world is very dynamic. It's always changing. And what happens is with investors, everyone thinks their baby's the prettiest. So if you're just a healthcare investor, you think your baby's the prettiest. You're just an energy investor, you think your baby's the priest. If you're just in Europe, you think Europe's only good. So we try to do a step back from that. And then constantly as we go through economic cycles, credit cycles, secular cycles, geopolitical changes, and we think about things on a real time basis. And what we do is in 6th street we have about 450 to 500 deals coming into 6th street every month. Typically we have about 15 to 25 themes running through our firm at any one time. And the key is, and this is what we learned at Goldman, is that any theme that is good as a shelf life of somewhere between 12 months and 36 months because ultimately there's a lot of smart people out there and it comes in and it's a good theme, then it's a less good theme that it comes to, okay theme that comes, a bad theme, and then people are overcorrect and they start putting leverage on it and then you have a correction. And our whole thing, and this is why we had the tracker we had come out of Goldman and do it 6th street, is that we try to see through that and never get caught in that dynamic where the theme becomes less good, we migrate to other themes. So our average theme as a shelf life is a year to three years. If you take our themes from 20, 20, 25 and you go back to 2022, the 15 to 25 themes might be a little bit over, but most of them are different themes. And that's why we always think of 6th Street. We have to be a firm of entrepreneurs because if you think about what we're doing, we're constantly migrating to the best risk units and return units. Obviously also trying to be a value added partner to CEOs and management teams because the world's always changing. We have to be constantly coming up with new themes. And that's what we learned at Goldman.
- [13:44]
Patrick O'Shaughnessy
How did you recruit people into ssg? Was there any lesson on the on ramp?
- [13:48]
Alan Waxman
First of all, back then it was the group to get into. It was the hardest group to get into.
- [13:53]
Patrick O'Shaughnessy
Even sounds like Special forces ssg.
- [13:55]
Alan Waxman
When the Wall Street Journal called the group the Navy SEALs, I think that created a little bit of halo. So it wasn't finding people interested, it's finding the right people. And for us, what we were looking for back then and still today at 6th street is first of all, we want really nice people. We have a saying at 6th street and it was true back then. Something we learned from the San Antonio spurs is we want people that are over themselves, the enemy of a multi strategy investing businesses, fiefdoms and silos. And if you have people who don't want to be team players and share information and share relationships, the whole unitization of risk units and return units, it all breaks down. So culture goes hand in hand with our investing style. So the first thing is did they fit in culturally? And then the second thing, obviously everyone's gotta be smart enough, but we really wanted people that could think critically, but also were open to the anti of My baby's the prettiest people. They don't fall in love with whatever they're spending time on. They have the ability to sort of what we would say at 6 Street is the play tennis. And like comparing a healthcare senior secured loan to buying a healthcare company to a European real estate deal to a Asian infrastructure deal. Be able to sort of engage in what we call playing tennis, to sort of compare relative risk reward and sort of the backdrop of whatever we think the macro environment is as well.
- [15:13]
Patrick O'Shaughnessy
I never heard that phrase, people that are over themselves. I love that phrase. Anything else you learned from the Spurs?
- [15:18]
Alan Waxman
So I started running business. I think I was 25 years at Goldman. We always said no politics, no BS, no egos, nice people. That's what we wanted to be around. So I grew up in Austin, Texas and I was always a San Antonio spurs fan. So I was always from afar, but a big fan of Popovich. And R.C. buford, who's literally one of the best sports executives. He's unbelievable and almost like a brother to me now. He's an exceptional human being. But we went in there, I was describing 6th street and RC based in one of our first discussions says, yeah, we have a saying for that. Popovich said the same thing. It's are you over yourself yet? I said, why do you say that? He goes, that is literally the ultimate expression is can someone be a good teammate? And I thought about deeply. We took no politics, no bs, only nice people. And we translated that to now we say, are you over yourself yet?
- [16:08]
Patrick O'Shaughnessy
If you think back to the SSG days, what was the investment or trade that you were most proud of that Most encapsulates many of these ideas.
- [16:16]
Alan Waxman
We obviously did really well. There are a bunch of investments. I think the thing that we're most proud of is that during 2006 and 2007, when things were getting irrationally exuberant, we actually started to pause. We didn't know what was going to happen in the gfc. We're, I think, the only principal investing group. Maybe there's one other that didn't lose money in 2008 on a lot of capital. We didn't make any returns, but we protected capital. And it was all from that process that we went through of really comparing relative risk units to return units. And we started to see things that just didn't make sense. We still invested, but we're investing in different things that we thought would be very protective. We didn't know when the party was going to end, but it just was getting out of whack. It's really what we didn't do leading up to GSE is probably what I'm most proud of. And quite frankly, had that not happen, I don't think we could have, when we started 6th street raised the first fund we did. Had we not protected capital in 2008 because so many people in seats like mine blew themselves up during the gfc.
- [17:19]
Patrick O'Shaughnessy
Back then, did you think of yourselves as financiers doing a primary job for the person or group receiving the capital, or did it feel more like arbitrageurs or something like that?
- [17:30]
Alan Waxman
We love investing and it was really about trying to create solutions. Because our capital is so flexible, we could go sit down with any CEO or any management team. We go in there and we just listen and this will sort of resonate. We were talking about earlier is one of our core skill sets is asking questions. So we just be asking questions and we say the prototype deal at 6th street, but also back then is we can get on a whiteboard with the CEO management company. They have an idea what they're trying to solve and we get up there and we start whiteboarding it and we come up with solutions. Maybe it's a structured equity investment. Maybe we buy an asset, maybe we do a joint venture on one of their assets. It could be anything. But we walk in there with a very entrepreneurial mindset, bespoke mindset on every deal that is a six street deal, whiteboarding with the CEO or management team. And we can do that at scale. Back then, I mean, that was really how we were thinking about things. When I think about arbitrage, that's short term we're long term investors, we're three years to 10 year investors plus Arbitrust. To me that's more trading. We weren't traders or terrible traders. That's not what we do. But thinking about fundamental value, but also trying to find the right management teams that CEOs to back and then getting to those diets where we're really their partner and we're able to get on a whiteboard that was a prototype deal for us.
- [18:46]
Patrick O'Shaughnessy
It's like a fundamentally creative process. It reminds me of Richard Rainwater and all you heard about how he would structure things and take all comers. Lots of whiteboards in that office apparently.
- [18:55]
Alan Waxman
We always talk about it. We just had our off site. I talk about right brain thinking and one of our core principles is don't group thing. That's why I benefit being out in Seafords because I live with all the AI tech guys that are all on your podcast and I, I learned from them. I'm like a fish out of water there. But it's just that independent thinking. I mean, that's why I've never talked to competitors ever. Not because they're not super talented and great investors because I don't want to be infiltrated with their thinking. So I get into group think. And that's why we try to really think about things through that right brain lens. Because that's how we start different businesses, that's how we find new themes and we can't do our business if we're not using our right brain. It's a core part of what we try to do.
- [19:36]
Patrick O'Shaughnessy
One of the really cool things about your structure is this unit of risk concept. Hearing you talk makes me realize that basically every investor takes their specific unit of risk for granted. It's the same every time and I find that fascinating.
- [19:49]
Alan Waxman
When we came out of Goldman, I'd never talked to an LP before. I didn't know how to talk to an lp. That's a whole other story. One of my mentors, and we call him the godfather of 6th Street, Jamie Gates. Our first fundraising meeting we went to was with a large sovereign wealth fund. I'm like reading every word on every page. He's doing these hand signals like let's go, let's go kick him in. It was not good. We never talked to an investor, but I remember getting out. We first started talking to investors on 6th Street. We had a really hard time in the beginning because if you think about the LP world the way it's set up, it's very siloed you have your private equity group, you have your fixed income group. Now you have your private credit group, you have your real scrap infrastructure. So we got lucky because David Vineyard was our cfo. We had one lp, so we were completely unconstrained and on site. We just couldn't lose money. You grow up in the world. Today, when I first got out and we're talking LPs from let's say, a very big pension plan. And at first, and I'm describing what we do and they can't fit us in a bucket. They're like, wait a second, are you in this bucket? Are you in that bucket? And then he said, we need 20% returns. I was like, okay, how much leverage are you taking to get 20%? It didn't matter. No one thinks about universe. They only think about nominal returns. And that's why we've always talked about from beginning and I think many LPs have gotten a lot smarter on return units and risk units. But nominal returns, they're just underlying risk because there's so much leverage out there. People can make returns whatever they want through leverage, but it's not capturing units of risk. And at some point the AI is going to figure out how to quantify units of risk for private capital. That'll happen someday. That has not happened. People still think about nominal returns versus just the skill of investing.
- [21:29]
Patrick O'Shaughnessy
So where I was going with it was typically it's not a line of question. Walk us through your thinking about risk. Maybe they'll think about loss ratios, some basic stuff, but not multi dimensional thinking around risk in a given asset class. And so I'm curious because that's all you've ever really done as an investor. For you to teach us some of the surprising things about what you've learned. Assessing risk versus Everyone spends so much time assessing return. What could this be? What could the return be? Less time on the risk side. What would surprise people is the most important parts of that evaluation process.
- [22:00]
Alan Waxman
Human beings get into behavioral patterns. They look at the past and they just keep going. Direct lending has oscillated between a really great time to invest and a less good time to invest. And it's all driven by capital flows. Somewhat recently you see a whole bunch of new money coming into, let's say direct lending. And I think people get caught in these tunnels and have a hard time stepping back. Either they don't have the periphery to look at it, or they don't have people around them that have been through cycles. But they get in these behavioral patterns and they have an inability to look back. And I think whenever there's a crisis and people lose money and we saw this in 01 02, I saw a little bit in August 98, definitely saw it on GFC, saw it in Covid before the Fed bailed everyone out. Some people that shouldn't have looked smart look smart, but that's a whole other thing. I think people are surprised when that happens. But it's all right in front of you. In oh 6, oh 7 you could have looked at what's happened. There's over 100% loan to value loans, the houses, anyone could get a mortgage. There are all these mortgage renters just pumping with no consideration for credit quality. And I think just the tunnel vision of ignoring not only the risk units on that particular deal but but the risk units of what's around you, that's one of the biggest mistakes that people make. And I don't know if people are surprised by that. But it's very hard to evaluate risk units if you're only looking at through one lens versus multiple lenses. That's what we learned back in 2001, 2002. We had all those 10 disparate businesses where no one was talking to each other and that's why they were actually put together. I give David Vineyard a ton of credit as probably the best CFO in my opinion ever on Wall Street. He is one of my mentors. He is exceptional. We're the biggest investor out there back in the late 90s and early 2000s and there was a bunch of loss making businesses from all these disparate principal investing business and that's why Goldman put them under one umbrella. I think that pattern of not thinking about things in a siloed way versus the overall periphery, I think that's what we're going to be talking about sometime here in the next two to three years.
- [24:11]
Patrick O'Shaughnessy
To continue to contextualize this notion of units of risk today, what do you think are some of the maybe overlooked sources of risk in the system as you see it? Since you get to see it from every angle. This is early summer 25.
- [24:24]
Alan Waxman
We have experts at 6th street, my partners Marty Chavez, who's on the board of Google and Adam Corn who ran Goldman Sachs engineering business who are experts on AI. So I'm not an expert in AI, but I think one of the things that you've talked about on your podcast is just the whole transition. Once the productivity gains start to come, there's obviously going to be job losses and just the transition to sort of remobilize capital. How's that going to work with the real economy? I don't think enough people are talking about it. One of my good friends, Jeff Weiner, former CEO of LinkedIn, he's the chairman, him and I have been talking about this for a while and I think for the first time Anthropic Co actually came out and said something publicly. So what I'm worried about there is that we're so focused on competing with the US Stated against other countries, specifically China, the magazine, they're all focused on competing with each other. And I don't think there's enough people talking about how we're going to manage this transition as again, there's going to be lots of productivity gains, which I'm all for, but there's not enough talk about that. It should be code red people talking about it. And that's not happened. So I'd say that's one, I think the other thing, and I think it's an opportunity, look at the average wealth investor. So the wealth channel, they're underexposed to private alternatives relative to say a pension fund at 40% or an endowment at 50%. So at 3 to 5%, that should probably go up. But again, the transition, everyone's all about the wealth channel, everyone's talking about. But the transition to do that in a way that's responsible to those wealth investors, those end market and I think getting to the right structures so that that's done in a responsible way, I think that is something to watch out for. Jamie Gates, the Godfather 6 Street one of the things he taught me early on is just because you can raise capital doesn't mean you should as a manager. Just because you can raise it in the wealth channel doesn't mean you should. And I would espouse that advice to all of our people in our industry.
- [26:28]
Patrick O'Shaughnessy
So I want to keep telling your story. After Goldman, but before tpg, what were you doing then?
- [26:33]
Alan Waxman
I actually told David Viney, who was a Mensch in March 2008, that I wanted to basically rebuild what we did at Goldman, but doing a more entrepreneurial backdrop. I stayed through 2008 just to make sure everything was well, because I wouldn't have felt good if the rails would have come off. There's no way I was going to leave those guys at that time. And then I took six months off, got married, went on a honeymoon. But before that really started constructing the idea of 6th street, which was formulated in a business plan called Project Austin. Project Austin laid out our values, our culture, our investment Philosophy all laid out our five year strategic plan, which is a big thing at 6th Street. We're now in our fourth five year strategic plan. We've been doing that since day one of the firm. And that set out the idea of 6th Street TPG. We're set up a little bit differently. So we were never employees at tpg. We never gave up control of our business. We always controlled investments, hiring decisions. We were kind of a firm within a firm, TPG at a minority equity stake and were great partners for while we were together. But that's how it all started.
- [27:42]
Patrick O'Shaughnessy
Say more about these consecutive five year plans. How do you do that?
- [27:46]
Alan Waxman
Our view on business building is if you don't have a compass, it's hard to know where you're going. And more importantly, it's hard to get everyone on your team matched up with that five year strategic plan. We just finished our five year strategic plan. It's an 18 month process, was 200 pages. I mean this is hundreds and hundreds of hours of all the partners debating, trying to really narrow down what it is, the direction of the firm. We first started our 2015 plan, what we wanted to be, and most recently our 2030 plan. We typically have 80 ideas. We narrow it down to 40, what we call sub planks. And those are organized under five strategic planks. We'd actually just present it to our entire firm. But we try to do, and this is something learned at Goldman is we basically take that five year strategic plan, we break it up into one year increments and then we have every person at the firm do their own personal business plans. What we always say, and this is from day one, is that we want the summation, all those personal business plans to equal the five year strategic plan. So we're matching every single person in the firm with the clear mission of what we're trying to do and what we'd say in our parlance, climbing up the mountain together. And that's just been a process and it's something that we take very seriously, evidenced by we spent 18 months and hours and hours of debating it and thinking about what we want to be and how we want to go about it. But it's something we've been doing and it's our North Star, it's our compass, it's everything. And it's an important part of the process and the business building of 6th Street.
- [29:10]
Patrick O'Shaughnessy
Can you talk us through the opening chapter, chapter zero, or the prologue and chapter one back in 2009 or so, and what was going on, what the biggest Challenges were. I'm always interested in how these firms get started and what challenges they have to overcome. Because often those are like the formative periods that then last a long time.
- [29:29]
Alan Waxman
We're a values driven firm. Our values are, number one, what we call our one life principle. Do you have one life? Do you want to be average or great? Everyone wants to be great. So that's the first thing. We want people that are all in. It's a competitive world out there. We want people that are all in. The second thing, and this goes back to one of the things we're talking about, is we want curious people that are constantly learning, that actually are constantly trying to grow. If you think about the idea of having to develop new themes every year and new ideas, we need entrepreneurial people. And then the third thing is a one team culture. So people that are over themselves, no politics, no egos, no bs, just so we can all talk to each other. So those are the values. We always said we wanted to be the largest startup in the industry. That's literally day one. We want people that can play tennis so they can debate. Not the my baby's the prettiest day people. And then the last one. This is something my dad taught me about facing the tiger. My dad's a crazy person. He's like a black belt. Yells at the tv. He's probably listening to this, but he's a pretty tough guy. But he always taught me, growing up, you got to learn how to face the tiger. By the way, when you go to 6th Street's offices, literally, you get off the elevator, there's a big tiger just staring at you. There's three elevators, and no matter what elevator you get off, it's staring at you.
- [30:44]
Patrick O'Shaughnessy
Sculpture.
- [30:45]
Alan Waxman
It's huge. Five feet. You got. You'll come to our offices one day. The idea on culture is that when something goes wrong or there's a challenge, you go through different things. Most people are like, pointing their fingers at other people or they're, it's not my fault, or they're running away. At six street, we're like, good, let's go. And we say, let's face the tiger together. The first thing is defining values and culture in our investment philosophy, which we spoke about. But then, what's our genetic code? For us, the most important thing about our genetic code is we want to be an investor first firm. We love investing. We love this idea, this process we go through. We love meeting CEOs and management teams, particularly today, where it was starting to happen back then. There's a little bit of asset aggregation. Now it's a completely different thing. Our ethos and what we want to be. We're investors. If you talk to our partners, the day we become not an investor first firm, we're not here. That's literally number one is every review process, every person we hire, it's designed around people that love to be investors. So that multi strategy. So this idea of the world's dynamic, it's always changing. We laying that part out in terms of being a multi strategy investing firm. Migrating the best relative risk units and return units. Thinking about that. And then the last thing is that whole cross platform collaboration at scale. Because our business model doesn't work if we don't have that cross platform collaboration at scale. Because otherwise information and relationship get trapped in fiefdoms and silos. Six year we have 10 investment platforms, all organically built. You know all the people, the business leaders at each of our investment platforms, they all talk to each other all the time. We're all trying to think about where is the best place to think about comparing risk units and return units and obviously places where we can be value added partners. The CEOs and management teams.
- [32:29]
Patrick O'Shaughnessy
What are the dimensions of facing the tiger? Well, if you were teaching a college seminar on how to do this, what would you tell the students?
- [32:37]
Alan Waxman
Human beings, natural reaction. When there's a problem. And you can see this in so many facets of life, the first thing is to run, particularly in our industry. I saw this happen in other groups at Goldman. I've seen this happen in different companies and I have friends that have told me stories. All of a sudden there's a problem or there's a bad investment and all of a sudden everyone starts to try to distance themselves from that and try to point the finger at some so it's not them. Or some people freeze, they start to get hyperactive and they start to make rash decisions. And for us, let's go, we're going to do it together. There's one of our worst investments of all time. It was a plastic bottle company only time at 6th street, knock on wood. We got defrauded. We made a structured equity investment. A company, I won't say which one, but a European company. I'll never forget. We were in the room in New York with 30 people. There was a bunch of different investors, A big company. We figured out that they had defrauded not only us, other investors. And I'll never forget we went to PJ Clark's in New York, the burger place. And There were like five of us there, and we went over there, all from different groups. We knew things were not going as well. And we're like, holy shit, what is going on here? And we're like, let's go, Stephen. Plus, you're going to do this. Sam did, or you're going to do this. I'll do this. Borna, you're going to do this. And we just started doing. We called in some other people. We literally had a team of 12 people, all different parts of the firm, doing everything we could. And the reality is we ended up getting 50 cents on the dollar. We should have gotten 2 cents. And it was all because it was just game on. And that's what we do when things are going well. Obviously you don't have to do that. But again, what we always say, that's what defines cultures. And you have those moments of, what are you going to do in this situation? Are you going to do the right thing? Are you going to come together? Are you going to point your finger at someone else? What are you going to do? And our whole thing is, let's face the tiger together. And that's what we do.
- [34:32]
Patrick O'Shaughnessy
I would love to tell the stories of the Spotify and Airbnb investments that you made. People know those names, so it's very relatable. But also I think are good examples in the mid 2010s, a little bit later with Airbnb of how you do business. So maybe start with the Spotify one and just tell that story.
- [34:48]
Alan Waxman
We love Spotify as a theme. We love live music. It's hard not to like live music when you grow up in Austin, Texas. But great product, great unit economics. But if you remember, in 2016, there were starting to be a lot of commentary about threats from Amazon, Apple. There was a cloud over the company at that time. A lot of people don't remember that. So there's a little bit of volatility in the markets. But more importantly, people are worried about the competitive threats. When this came in as an opportunity, obviously we had a number of themes. Technology businesses or software businesses that we thought had really good unit economics. This was one of the tops of the list. That was at a time when they weren't producing cash flow. So they're still creating cash flow losses. They need some liquidity. So our investor group stepped in. We gave him a billion dollar financing, a convertible instrument. Obviously spent time with Daniel. It takes one second to figure out that guy is generational. The rest of the team that Daniel had put around him was great Barry McCarthy at the time was a CFO, really smart guy. And then everyone we met on the management team mission align. They had values, they had a culture. It was very clear. Everyone was on the same page. And sometimes in companies, you go in and you talk to the cfo, what's the vision? And that's different than the CEO, different than the head of revenue. And for them, it was just very clear that they were just dialed in. They obviously had first mover advantage. They didn't have been a great investment for us, but it was a little bit contrarian when we made the investment.
- [36:16]
Patrick O'Shaughnessy
Maybe say a little bit more about the security itself, because you can operate at any part of the capital structure or whatever. Like you said, always curious the actual way you did it.
- [36:24]
Alan Waxman
On that one, what they were trying to solve is at the time, they didn't want to raise common equity because of the competitive threat from Amazon and Apple, or perceived, I should say, because the market volatility. They didn't want to sell equity because it was going to be at a lower equity than the last round. So they were looking for more of a whiteboard solution, literally. Barry McCarthy, whiteboard, what are we doing? He had certain principles and we just tried to solve around those principles. And that came up with. It was a convertible debt instrument. It had a cap. I think the cap was at $25 billion. It had a current yield component. And then obviously the whole idea was to bridge them, to get public. So it was like a pre IPO security to bridge them through that. And ultimately it was successful and went way through the cap, which created a win solution for them because they got to their ipo, which they were very focused on doing for. For a whole bunch of reasons. And for us, it worked out. It was almost like an engineering and whiteboarding. And again, a lot of times the ideas aren't, here's the holy grail idea. It's from just talking, playing tennis, asking questions and listening. And that's what we do. That's what we train our team to do. How to ask questions, how to listen. That's literally the process that we went through with the other investors.
- [37:38]
Patrick O'Shaughnessy
Before we get to the Airbnb story, can you talk about Tao and the unique nature of this massive pool of capital that you've created that can do whatever it wants. I'm always fond of this idea that what you end up getting from an investor reflects their capital base, who it is, the duration, the terms. They then ship their capital base in the form of investments. And so I think understanding Tao and the overall structure is important.
- [38:00]
Alan Waxman
When we were setting, doing Project Austin, we literally studied every gp. We had case studies on every single gp, what they did right, what they did wrong. And we also spent a lot of time on figuring out some of the GPS that were big brand names and then just faltered away. What we concluded, and this is a pretty obvious thing now, but where people get into trouble as they raise larger and larger funds in a strategy that maybe it's the right time to raise a larger fund, but maybe it's not. What's the opportunity set? They kept raising large and larger funds and we didn't want to have that pressure. And this is getting to Tao. We want to design our architecture 6G, which is different than any GP out there, at least the ones that I know as an investor first architecture. And what we did is, although we have 10 investment platforms at 6th street, each one of the platforms. So think about our growth business. If we didn't have TAL, we'd probably raise an $8 billion fund because we want to be able to do the larger deals. But because we have to, we want to keep the fund sizes to the level of the opportunity, but we also want to be able to do the largest deals in the market. I mean, we want to be able to do the billion, 2 billion. We're one of the few handful of firms in the world that can consistently write billion dollar plus checks across asset classes. But architecturally, we keep our investment platforms, funds at modest sizes matched to whatever the opportunity is over whatever the investment horizon, that fund. And then we have this vehicle called TAL on top, which is effectively, in our words was when we first raised it, the synthetic Goldman Sachs balance sheet, which could do anything, obviously with the same principles that we've had for the last 25 plus years. We started investing at Goldman. That gives us stability in a growth deal. Let's say the next Spotify deal comes and let's say it's a $2 billion deal. Well, if we only have a $4 billion growth fund or $3 billion growth fund, there's no way we're going to be able to do that in the growth fund. But by having a $30 billion fund over the top across the entire firm, we have the ability to keep the fund sizes small, but at the same time speak to the larger deals. And then also anything that doesn't fit with any of our investment platforms, we have the flexibility to do that. TAO is flexible from asset classes. So it's got everything in there. Real estate infrastructure, private credit, growth, mostly private but as the ability to public, it can go anywhere on the duration spectrum. So it could do a two to three year investment. But we have investments in there. We have a strategic partnership with Real Madrid and also a strategic partnership with FC Barcelona. We're probably the only people in the world that partners with Real Madrid and FC Barcelona because they trust us. But those extend further than 10 years. So we have maximum flexibility or unconstrained, because again, that's what we learned at Goldman. The world is dynamic. It's always changing. And you need that flexibility because you never know at that particular time or this particular environment where's the best opportunity is going to be. We always want to have that flexibility to migrate to wherever the best opportunities are. I think the most important thing about TAL is that it's consistent with who we are as a firm and our ethos about we want to be an investor first firm.
- [41:04]
Patrick O'Shaughnessy
Now, let's go back to Airbnb, because I think this is like a classic early Covid example of the returns to flexibility.
- [41:10]
Alan Waxman
We were one of the few firms in the world playing offense at the beginning of COVID And the reason we're playing offense, because we had a good defense, very similar to what we saw in 06 07. We started to see those same dynamics, tunnel vision of investing. We started to see some of those same dynamics. And 18 and 19, we couldn't have called Covid, but things were getting skewed in a wrong way. So we protected the portfolio. We're in a position to play offense. Right. When Covid hit, we went around and said, what are the best business models in the world that are most impacted by Covid? Think about 60 people across 6th street working weekends, all day, every day, trying to figure out are 15 to 25 themes before COVID throw out the door. And what are our next 15 to 25 themes? One of the themes there was best business models most impacted by Covid. Airbnb, great business model. If you remember at the time, there was a lot of negative press on Brian Chesky at the time, which was, by the way, unfair and unwarranted. But there's a whole bunch of stuff going on at the board that didn't deter us. So we literally started calling into the board, people we knew on the board, calling in the bankers, because we didn't have a preexisting relationship with Brian, but we knew people that were around him and ultimately came in. And that was an interesting time because the thing that Brian did that was really smart, he did a lot of things that were smart, the way he operated through that. And the first time we met him on a zoom call, he had a lot of advisors. And despite all that, his values, the mission, the principles were all the same. We talk about a lot of special humans today. Daniel and Brian, David Vineyard, special humans. But they wanted to fortify their balance sheet so they could play offense. We and our friends over at Silver Lake basically gave him a billion dollars, was in a loan form, had some warrants attached to it, ended up getting them through the period. Obviously, things started to get better. But the most important thing after that happened, they were able to start playing offense versus playing defense. And I think the other thing it did is it really solidified what we already knew, that Brian was such a great leader and he was able to get this done.
- [43:17]
Patrick O'Shaughnessy
I'm curious again, in your framework about what the unique units of risk were in that specific transaction relative to those returns.
- [43:24]
Alan Waxman
That one was, first of all, we had to be right on the business model. So from afar, we wanted to make sure that the business model what it was. The second thing is they wanted to get it done in seven days. So we had a team at 6th street in Asia, a team at 6th street in the U.S. a team at 6th street in Europe. So we had to do all that in a compressed time period. It was at the beginning of COVID There wasn't a vaccine or anything. So our view is, for us, it was as much about the fundamentals of the business as it was how much liquidity Runway can they have. And we had to make the bet with that liquidity Runway that there would be a cure, something would get better. They obviously had a lot of leverage to manage the business, but it gave them up to like four or five years of liquidity. This led to another theme on sports and live entertainment. Because we learned that we like experiences, so humans like experiences. But that was our analysis. So the fundamental business analysis, make sure everything in the unit economics were what we thought. Making sure that the management team and the CEO were what we thought. But the other thing, it was really a liquidity analysis. And then making that not in the spreadsheet judgment, which sometimes you have to do. That was as much of a risk unit as anything. Is the liquidity analysis to make sure how much Runway do they have?
- [44:36]
Patrick O'Shaughnessy
Do you try typically to boil things down to a simple bet like that so that you understand it in simple terms and you're not creating too much complexity where it doesn't.
- [44:46]
Alan Waxman
We like complex things, but in terms of the ultimate call, I mean we do all the fundamental analysis, but ultimately investments come down to three or four or five things. I wouldn't say we simplify the overall investment, but we try to simplify what are the three or four or five things that matter. And we know those things inside out. We also understand, and this is the other thing investors do. People only think about explicit risk. They don't think about implicit risk. So we always try to put that lens on it. What are the implicit risks that we're assuming away? One of them, in the case of Airbnb, is we're assuming a way that there will be a cure. We can't all be locked in our houses forever. We were willing to take that risk, but we had to think about that because that was part of the investment. But ultimately it comes down to three or four or five things. So I'd say, yes, simplify things, but it always comes down to those three to five things.
- [45:34]
Patrick O'Shaughnessy
When you think about what success means for the whole firm from a return and risk standpoint, how do you think about it? Is the ultimate comparable for units of risk and return like the S&P 500 or something? Is there an explicit goal of we exist to beat this thing or provide our investors with something more than this?
- [45:51]
Alan Waxman
Our investors have expectations, but ultimately we're an absolute return investor. Sometime, if you just take an extreme example, let's say that every single asset class is flooded with liquidity. Maybe that's not the right time to invest. And sometimes the best thing you can do as an investor is not invest. But in terms of returns, it really depends on the level of risk units. In 2017, we saw 15 to 20% deals, but it was too far out on the risk spectrum. So we said, listen, that's too much risk, even though that return is there. And some people kept doing that, and some of it worked out well until Covid. But we try to think about the environment that we're in and what things are giving us. Also, our investors have a set of criteria for each fund that we try to meet that expectation as well.
- [46:37]
Patrick O'Shaughnessy
I'm very intrigued by the fact that some of the great go anywhere investors gravitate towards sports at some point. Talk about the Real Madrid FC Barcelona transactions, what you're doing, why you're involved in the, what you like about that space.
- [46:50]
Alan Waxman
This is a theme coming off of COVID Sports and live experiences. So 2020, a lot of the investments in sport teams you weren't actually able to do as an institution once Covid happened and all these big franchises, revenues went to zero. People weren't going to games. They still had some of their media deals, but it went to zero. So for the first time ever, they started to reach out to institutional partners. Our whole thesis in sports is the biggest global brands in the world. And our whole thesis in sports, and we can talk about live entertainment and is that these are historically local brands. And because of technology, you can be on your phone and you can actually watch anywhere in the world. You can be a Dallas Cowboy fan Australia watch, or Real Madrid fan in China and watch that whole local to global. That was our thesis. So we literally just started through our relationships, calling on the top global sports franchises in the world. Now we've got San Francisco Giants, we're partnering with the Dallas Cowboys and New York Yankees, and then two of the biggest brands in the world, FC Barcelona and Real Madrid. We started calling them building relationships. I mean, the deal with Real Madrid was they wanted to do business with us and we want to do business with them. And it was again, a whiteboarding exercise. That structure we did with Real Madrid, where you basically formed a joint venture with them, partner with them on their stadium renovation, which is the Bernabeua, that was the use of funds. But we formed like a company that sort of owned the stadium assets. But when they came to us, they had an idea. We had an idea. And it was literally multiple whiteboard sessions to come up with that structure. And now a number of people have tried to deploy that structure elsewhere. FC Barcelona, again, because of COVID it impacted their financials. They needed to do something. Joan Laporta, incredible human, as well as Florentino, two people I've become friends with through the Real Madrid and FC Barcelona process. They were trying to pull levers to basically be able to keep the roster together. Because their view was if we lose key components of the roster, we won't be able to stay competitive. And you can see how they've done since then. But that's sort of how those deals came about.
- [48:57]
Patrick O'Shaughnessy
The stadium one, as an example, there's this interesting push and pull. They know the money they need, and for what they're probably optimizing for giving up the least or finding great partners or whatever. And there's some minimum return that you need to get interested in. What is that push and pull process like at the whiteboard? How do you communicate to them? These are the things that we need.
- [49:18]
Alan Waxman
First of all, what are they trying to solve? They say, this is what we're trying to solve. We're investing a bunch of money into the Bernabeus stadium. So this is the use of funds. So what structures? They didn't want to do debt, so we had to do effectively an equity joint venture with them. We come up with solutions, we price those solutions. We say, look, here's option A, here's option B, here's option C. They say we, we kind of like a combination of option A and option B. We go back to the drawing board, we come back and we say here's a hybrid of option A and option B, which is what happened on that deal.
- [49:47]
Patrick O'Shaughnessy
In those different options, what are the.
- [49:49]
Alan Waxman
Key levers for every deal? They're different. If it's an equity deal, obviously price. If it's a hybrid deal where it's convertible deal, there's a yield component and a strike component. If it's just a private credit deal, it's just a yield component. Sometimes when we're doing joint venture, we're like, what are the value added operations? In that case, one of our portfolio companies, Legends, is providing services them that is helping them uplift their premium offering within the stadium. So we underwrote that and put our money where our mouth was on that. So in each deal the levers are different. And that's the thing. It's a whiteboard because we've got a toolkit which we've been using for 25 plus years. But we feel like we can price anything that's not binary stroke of the pen risk. And then it's got to work for them or if it doesn't work for them, we go back to the drawing board and try to construct something that does work for them. But in all these deals, you see where it all takes place is the whiteboard. And it's not what we initially proposed to them or what they initially proposed. It's that partnership with CEOs and management teams.
- [50:48]
Patrick O'Shaughnessy
So in this case, there's a stadium that's mapped onto a bigger organization that produces lots of revenue and has lots of streams of revenue, etc. Are you always looking through to some underlying holistic whole thing and figuring out how the joint venture that you own equity in benefit? Because the stadium by itself is just a thing. So the ticket sales or something and the revenue associated with the stadium itself becomes the thing that the joint venture.
- [51:12]
Alan Waxman
In that case, you got premium VIP suites, you have food and beverage, but premium offerings, you have a museum. If you've ever go to the Burnab, there's an incredible museum of tickets too and go see all the history, it's the premium tickets. But in all these deals there's different levers depending on what it is. In this case it's a perimeter of assets, but it could be the whole company, a firm. Max Levchin's company, we did a $20 billion partnership with them where we formed a joint venture with them so they could originate more assets and have more operating leverage. So that one, my partner Michael Dryden, who runs our asset based finance business, has no Max, a long time gets on a whiteboard, they start mapping up. It's not like you can pull it off the shelf. Most of our deals you can't just pull off a shelf. It's right brain. And that's why when I say one of our core principles, that independent thinking, stay away from the group thing, just think differently.
- [52:05]
Patrick O'Shaughnessy
What is the process by which you develop the 15 to 20 themes at any given point in time?
- [52:10]
Alan Waxman
At any one time we have 50 to 60 themes bubbling through 6th street because remember, we have 10 investment platforms to figure out.
- [52:16]
Patrick O'Shaughnessy
Each have a couple, each have five.
- [52:17]
Alan Waxman
So they're constantly bubbling. And then from that there's really good themes, but they're not actionable. So we narrowed down 15 to 25 themes where those come from. It's from sector knowledge. We have 16 different sector franchise. So each of those sectors is doing primary research about their ecosystems. Thinking about not only what does that ecosystem look like today, but what's it going to look like tomorrow. There's research. Some of it's. We've got a whole bunch of long standing relationships with CEOs and management teams. And they'll call us, say, hey, we're seeing this in our sector, we're seeing this in our business, or we're seeing this. So hey, that's interesting. Let's follow it up. Sometimes we're looking at a company and we're looking at that's an okay business. And then we look at the supplier to that company, like, wow, the supplier is actually more interesting than the company we're looking at. Or we're looking at a company and this customer's more interest. And then the last thing is just sometimes all of a sudden you start to see free deals. Data centers. Obviously that's not a good example because we started doing data Centers back in 2017 with Air Trunk, which we can talk about. Cause that's a company we started, literally started the white sheet of paper, which is actually just got by Blackstone for I think $16 billion or something like that. So we'll look at a deal and it comes top down, bottom up, and sometime we just have a View on something and we'll start doing a bunch of primary research. But a lot of it's through primary research, through relationships. But it comes from everywhere. It's not one place, it's everywhere. And that's the whole point of our firm is that because there's no silos and no fiefdumps, all those things get circulating up. All of a sudden we see a theme from our power people. We have team that all they do is power our data comms people, data communications. And we see a conference, real estate people. And this is what's going on with AI. The constraint of power. Putting all those on one umbrella and like, hey, let's have you guys all work together on this.
- [54:04]
Patrick O'Shaughnessy
What are your favorite two or three themes right now? The ones that personally animate you the Most?
- [54:10]
Alan Waxman
We have 25 themes running through the platform right now. I'll just give you a few of them. Number one is partnering with big companies, big corporates to help advance their business. A firm we talked about thinking about partnering with asset originators and banks to basically help their origination, help their operating leverage. So that's a big thing in our asset based finance business, our real estate business. The idea of people getting older, wealth, tech. So we talked about the wealth space, the percentage of private alternatives and wealth that's going to go up. There's a whole bunch of services and technology around it. So I'd say wealth tech is one. Sports and live entertainment. We've talked about, we talked about the sports piece, but again, live entertainment. The one thing we learned during COVID is that people like experiences. They value experiences more. As you know from the younger generations, I know from my kids, they could care less about material things. They just want experiences. That is a big theme for us and you'll continue to see us do more than that. Those are some of the bigger ones.
- [55:08]
Patrick O'Shaughnessy
Given how big this has all become. Assets, number of people, strategies, investments. How do you spend your own time on individual investments versus on people and on teams. Because obviously you love investing. You know, the investment by investment level detail. But there's too much for you to like keep in your head at any one point in time. So what does your week look like?
- [55:31]
Alan Waxman
First of all, my partners that run the 10 different investment platform, they're great investors. When we first started the firm and investment committee, I was very vocal, probably 20, 30% of the conversation, in some cases more than that. And each year that's gone by, people just keep growing. And again, these are great investors. And I just less and less and to the point now on investment committee, I have views, but it's very rare where there's some issue or something we're thinking about or some way to create value in a particular company. Where through the course of all the conversation, Investment committee, I can just sit there because everything that I would have said or would have asked has already been asked. In a lot of cases, asked better than I would have asked. And I'm on the big investment committee. Some of the smaller deals I don't get involved with. But again, I'm sitting there watching my partners, kind of what David Venner used to do, watching a tennis match. And again, not only listening to the partners, but also some of the junior people or mid level people. Sometimes the best ideas come from them. So some deals I'll get involved with, I'll get involved with one or two deals a year, like a deal like Airbnb, I was the front person, deal like Real Madrid with my partner Rich Brody. The bigger deals I'll step in and get actively involved. But. But in general, we have a great team, not only with the partners, but the next generation. The next generation in terms of running the business, obviously I think a lot about our strategic plan and executing the core strategic priorities. So I try to think about big boulders and there's five big boulders generally very related to our strategic plan. Maniacally focused on that. I got excessive amount of energy, as you might be able to tell. What I try to do is keep the culture. Culture is everything. If I see something not working the way it is, or some deal doesn't get passed to another group, or some relationship doesn't do that in an unfettered way. It's so counterculture to like hive relationships or not call people back or not help people. Even though it's a deal not related to your particular sector, I'm trying to make that very counterculture. If I see people acting with ego or something, I'll pull them aside and I'll be like, that's not how we do it here. And I'm maniacal about that because it's not just culture and abstract, it's how we actually execute our business model and deliver great outcomes for LPs. And then the last thing I try to do is what I call toggle like a hawk. So I got the right people in the right seats. They bought into the culture. They're good investors, they're good managers and leaders. They know what we're doing, they know what we're trying to solve. They're willing to work Work with other groups. We have really good reporting. So that's one thing I learned at Goldman. Communication and not fancy reporting. So I always know what's going on. And then obviously I talk to probably 20 or 30 people a day throughout the firm. My average conversation is probably two or three minutes. I literally talk to people all day, all the time, just to fill what's going on. And if there's ever a situation where I need to go 10,000ft deep, I'll go 10,000ft deep. But then I try to go back up so I can just see everything that's going on. If I'm 10,000ft deep every day, I'm not doing my job. And that's kind of how I think about it. But those are really how I spend my time. But the reality is we have great set of partners. A lot of the partners, we've worked together for 20 plus years. We have shared values, first principles on doing business the right way. So a lot of those first principles are already in place because we've worked together for so long. We all know what we're doing and we, we all buy into the mission of what we're trying to do. Keeping the culture the way it is and making those type of behaviors that's life is too short. I just try to protect that with everything.
- [59:09]
Patrick O'Shaughnessy
All these fascinating stats that are coming out. Apollo put out that stat about the percent of companies north of a hundred million of revenue that are private is 93% or something like that. It just seems like the private markets and let's say the allocation of an average high net worth wealth advisor client or something is 3%, it's going to 30% or whatever. Maybe they overshoot and that's the problem. And then they have a liquidity crisis and that's the problem. But I'm just curious for your commentary on. It's amazing to me how few net new pure public equity investors I interview. It's kind of a dying breed.
- [59:43]
Alan Waxman
It's kind of ironic when you step back and think about it. You basically have all these public companies. There's less public companies, it's going more private. But now you have all these trends of people trying to take ETFs on private companies. So it's almost like a snake. It's a little bit, it's a little bit circular. That's really interesting when you start thinking about ETFs and now there's going to be trading private capital. So all this stuff is a little bit circular, but it's a real dynamic And I think it's something that anyone that's thinking about investing and thinking about capital allocation needs to take real note of these dynamics because the real dynamics. And by the way, I think for some of the traditional sovereign wealth funds and pension funds, they've had unfettered access to gps. And I think they've got more competition coming in from the wealth channel and insurance channel. So it's going to be interesting to see how all that plays out.
- [60:37]
Patrick O'Shaughnessy
I think like anything, the very best GPS are a lot better than the average ones. This is the way the same. The best companies are a lot better than the average ones. It's an interesting point that the best LPs will have to compete for the best GPS in the same way that GP's do for companies.
- [60:49]
Alan Waxman
It's starting to happen. You're starting to see with some of the larger LPs that are the traditional sovereign wealth funds or pitch fund, they're looking for access because they're worried about access in the future because they see what's happening. They see all this wealth capital coming in. I mean, there's not an earnings call where people aren't talking about the growth of the wealth channel and how much money they're raising, the oil channel, obviously seeing the insurance. So I think access to your best gps, those conversations are accelerating because again, ultimately everything's a choice of alternatives. And I think that dynamic is the other part of this.
- [61:26]
Patrick O'Shaughnessy
In addition to the beautiful people that are over themselves spurs idea, are there other outside sources of inspiration that have really fueled your thinking? People, mentors, icons like Popovich, anyone else that has cemented the way you view the world that we haven't talked about.
- [61:40]
Alan Waxman
When I got to Goldman Sachs, I met Jody on the airplane and I showed up to Goldman Sachs. I didn't know anything about finance and I remember going to the first analyst session with all these super smart kids from the best schools, all four point zeros and super intimidating. I had something very fortunate and also one of the most impactful things in my professional career happen is that when I first started, there was a bank called Ameresco in Dallas, Texas and they were failing and they needed to raise liquidity. I got tasked and I literally knew nothing to basically lead the evaluation of buying a portfolio of loans from a group called RTV Ventures. So as part of Ameresco is basically a bunch of loans to radio and TV companies. Back then, this is before direct lending or private credit because there was a lot of asset value to the radio stations and TV stations, but they had no cash flow, A traditional bank couldn't finance them. So what these guys had done, this is a little pocket in this big bank called Amresco. They basically had gone out and given these companies first lien loans at like 15% coupons and warrants for 10 to 30% of the company. You can imagine it's breaking my brain. They called it stick value. But they would take a radio station, a TV station and these things traded, they were sold all the time of say $200 million and they would lend the first $50 million. So from their perspective going back to sort of risk units, they were the first 25% of the value of the company in a first lien loan. Which at the time broke my brain. And the guy who ran that was a guy named Steven plus Stephen plus who's now 6th Street's chief risk officer. He's about 15 years older than me. We ended up buying the portfolio is about $400 million portfolio. And I was basically in charge of the portfolio. And Steven is a slow talking Texas guy. You meet him and you're like, is he going to get out the Senate or not? But he's one of the smartest guys out there. The fact I got a job at Goldman Sachs is pretty lucky. He basically for two years taught me finance, taught me investing, taught me about risk units, taught me everything, taught me about how to go through documents. I look back to it now, he was 15 years older than me. Here's some kid comes down from. Even though it's Texan, I was coming down from a New York firm. Now I still had a little bit of my Southern accent back then, which got beat out of me by all my friends in college. And here's this guy literally answering every week, every day, question after question. I used to have these yellow notepads and I literally would write down my 10 questions for Stephen Pless for the day and I'd literally call him and ask him. That whole process of him teaching me about investing and how to think about risk, how to think about return and just all that, it literally led to what made the start of my career at Goldman, where I started running businesses when I was like 25 years old. Because that whole idea with Steven is from that I started to say, wait a second, these are really high rates of return. And when I started to actually understand what it was. But couldn't you take other businesses that are good businesses that banks for whatever reason won't lend to because they've got a very specific credit box and still earn A good return, but not that high, and then have a much bigger tam. Could you do that in the middle market? And I technically wrote it, but Steven helped me write it, wrote a business plan when I was 23 or 24 years old. And that business plan was basically to do middle market direct lending. First of all, direct lending didn't exist. It wasn't a word. And Goldman Sachs had never done anything in the middle market. This is when I first met David Vineyard. But I just said, look, this could be new clients for Goldman. We could go out instead of earning on that portfolio, they were like 30% returns on first lien, maybe 10 to 12% or 13 or something less than that. But again, doing something outside of credit box, but on good assets or good businesses. And that business at 24 years old, I went to present to Hank Paulson, Lloyd Blankfein, David Vayner, the executive committee. And that was the first time that Goldman ever got in the middle market, is through that. By the way, that business joined Salisbury. One of my partners told me it's over $50 billion now. But it all happened because this guy Stephen plus took the time, answered all those questions, would have never happened. And that just taught me about developing people because I saw what happened to me. And that's how he put so much emphasis on. On developing the younger generation. Age is just a number. Get people that buy in the culture, work hard, that are intellectually curious, ask questions that really changed everything, but it really taught me a commitment to developing. A couple of my partners, Born A. Mog Bell and Matt Dillard, they were associates when they joined Sixtree on the first day. And I've been working with them every day since. Whenever there's someone who I think at six street needs development or could be better at reaching the potential, guess who I have him work with? Stephen plus.
- [66:45]
Patrick O'Shaughnessy
Pretty amazing.
- [66:46]
Alan Waxman
It's incredible. But that was one of the most selfless acts and it changed my life.
- [66:51]
Patrick O'Shaughnessy
My friend Ravi Gupta has my favorite framework for this development concept, which is demanding and supportive, is the orientation he wants to have towards people. How do you think about the framework for developing people and talent?
- [67:02]
Alan Waxman
That guy's a smart guy. That podcast you did with him, I thought that was a great one. He's super talented. And for me, it starts with caring. You have to authentically care for that person and you have to authentically care for their development. That's 1, 2, 3. And what I always tell all our leaders all the time is you got to be proactively as part of your day and Part of your week and part of your month thinking about, how do I develop this person? What are their strengths? What are their weakness? How do we do them? That's why we have this personal business plan that we make everyone do. But it's not only that. We have everyone in the firm do it. Part of the process not only have them do it, the other part of the process is having them go to their leaders and really sit down with them to sort of identify that. So for me, it's being intentional, it's being deliberate. But you gotta have a plan. You can't do it in an abstract, and you gotta be very explicit. And the way I think about the personal business plans is every year you have a personal business plan. The format of everyone's personal business plan is the same. The content's different. You have five things or three things on your list you need to improve. You knock down 70% of them. That's part of your toolkit. You leave the ones that you didn't knock down for the next year, those go to the next year, and then you add two more. I talk about future self all the time. You go through that process. You do that for 20 years, and you're deliberate about it, and you keep notes like you do on the yellow notepad, and you're intentional about it. Those people, while they're kind of get to 20, they. They're going to be optimizing their return on time because they have such a wide toolkit to go through. And by the way, the corollary to that is, allows them to spend more quality time with their family and their kids. Oftentimes, people try to skip steps. And the whole purpose of these personal business plans is the intentionality to really knock them off and be deliberate. You're not on an island. You're in partnership with whoever your leader of that particular investment platform is. And that's how we think about. We say, look, shoot high, because if you're doing 100% of your plan, of what you're trying to work on, you're probably not aiming high enough. But try to knock down 75% and keep adding to it, and you'll wake up one day and your future self will thank you because you get to spend more time with your kids and go to all their sports games, like I do today.
- [69:10]
Patrick O'Shaughnessy
Is the retention crazy high at 6th Street?
- [69:13]
Alan Waxman
We've never lost a partner at 6 Street.
- [69:15]
Patrick O'Shaughnessy
Crazy and think that's all culture.
- [69:17]
Alan Waxman
Maybe after this podcast we will, but because you got so many listeners. But you could argue Maybe we should have lost some. Maybe there's a criticism there, but there's different forms of compensation. I think sometimes in our industry, everyone thinks about one form of compensation, which is monetary, but there's who you work with. Compensation. What's your culture like? Compensation, are you getting developed? Compensation, there's opportunity. Do you have white space in front of you? Compensation. We try to take a more holistic view to that and we coach that. And people like to work there. And we don't have. We don't tolerate it. Will that pop up every once in a while or two? People get intense In a district that happens as long as it's with respect and dignity. And again, people get intense, but that's not what we're doing because again, our business model is predicated on people working together, not having fiefdoms and silos. So they all work together, share information, share relationships. That is literally the essence of our business model. That's why we're so focused on it.
- [70:14]
Patrick O'Shaughnessy
Say more about this concept of future self.
- [70:17]
Alan Waxman
I was very fortunate that my parents, we didn't grow up with a lot, but they always spent a lot of time with me. They were always present at all my sports games. They were just always there. So when I started working at Goldman, I had that in my mind whenever I had kids. I didn't know when I wanted to be able to be very present with them. My idea was, and it goes back to those yellow piece of paper, is that if I build the biggest toolkit possible, if I invest all the time now prior to when I have kids and a family and a wife, that I will be able to spend maximum time with them. I had a bunch of motivations. I was always thinking about my future self, not from a business perspective or career perspective, but that I could spend more time with my kids. These kids don't exist, by the way, so this is just like a future self. And my idea was it's all about return on time. Because investing is overwhelming. You could literally spend.
- [71:11]
Patrick O'Shaughnessy
You'll never reach the bottom.
- [71:13]
Alan Waxman
It never ends. There's like, you could spend all day on half a deal. It never ends. So I need to be able to be the most efficient at return on time the way I want to be efficient at return on time knowing, like, have the biggest toolkit possible. And I got to build that toolkit as much as possible. That's why I started doing my own personal business plans when I was just starting the business. But it was always with the mindset of my future self so that when I got to that point I could be a good husband, be a good dad, and be present like my parents were. I always talk about, think about your future self. You got to have fun. But the more time you put in now when you don't have a spouse and kids, you're going to basically set yourself up where you can spend more time. I think some people mortgage the future by having too much fun. Where you could have a little bit less fun and spend more time building your toolkit so you could spend more time with your family when it happened. And that was kind of always a motivation for why I was so focused on those yellow notepads and just that future self and that moment again, just to be clear, because I have friends probably listen, I did have fun, but I was also thinking ahead about that future self.
- [72:21]
Patrick O'Shaughnessy
If I apply future self to 6th street, to the whole thing, and you think five, ten years hence, something like that, what do you hope it becomes that it is? Not yet.
- [72:30]
Alan Waxman
I want to stay an investor first firm. Other people in the industry want to be deployment factories. There's nothing wrong with that. All good. But that's not what we want 6th street to be. That's number one. Number two is culture is everything. To me, there's two tests I'm going to always run. One test is that we have an off site every year in Austin, Texas, where the whole firm comes and I go walk around, I meet a bunch of people and I'm like, did I meet any a holes? Did I meet people that don't ask questions or just talk about themselves? And so far we're undefeated, 16 and 0. But the other test I'm going to run is when I'm an old man and 80 years old and I come back in the firm and I sitting in a random investment committee or a random meeting. Is that still true? And to me that's the ultimate test. And would I introduce the people then to my family, to my grandkids or my kids? Because that's the ultimate test. We always talk about that when we're interviewing people. First of all, are they over themselves yet? Which again, in our industry there's a lot of people not over themselves yet. Maybe they'll listen to this and get over themselves. That's a whole other topic. But what do you introduce into a family member that to me is more important than anything is maintaining that. And wherever that journey takes us, that's where it will take us. But again, for our business, we're an investing business. Those things are what make up us Trying to drive what we believe fundamentally religiously, because we've been doing it for 25 plus years. Great outcomes for our LPs, and if we can do that and ultimately serve your customer, which in our cases are LPs, our people, we do all those things, that's where it will take us. To be clear, we have five year strategic plans and very specific objectives. But that's what I think about on the horizon, and I've shared that broadly with our entire firm because it's how I think about it.
- [74:19]
Patrick O'Shaughnessy
I friend Boyd Vardy has this great phrase which is we don't know where we're going, but we know how to get there.
- [74:23]
Alan Waxman
Yeah, I like that. I like that.
- [74:25]
Patrick O'Shaughnessy
Which sounds a little bit.
- [74:26]
Alan Waxman
You got to be able to adapt because think about software engineers. Every mom and dad in Palo Alto three years ago was telling their kids they had to do software engineers and now tell them not to do software. Things can change and you gotta be adaptive. And we're headed into interesting times here.
- [74:42]
Patrick O'Shaughnessy
Well, I'm fascinated by what you've built. It's so interesting and fun to hear all about it, its history and its unique aspects and where it's led you. It's such a fantastic conversation. When I do these, I end with the same traditional closing question for everyone. What is the kindest thing that anyone's ever done for you?
- [74:57]
Alan Waxman
I think I'm gonna have to say that, Stephen. Plus being 15 years older than me and taking time to answer all my questions, in a lot of firms, I think they would have gone around me and said, what are you doing? And he took the opposite approach. That's the kindest thing anyone's ever done for me and probably the most impactful. I wouldn't be where I am today without him.
- [75:19]
Patrick O'Shaughnessy
Amazing. Thank you so much for your time.
- [75:21]
Alan Waxman
Thank you.
- [75:22]
Patrick O'Shaughnessy
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