‘Culture is Everything’: Sixth Street’s Alan Waxman on Flexibility and Alpha

0:05Welcome to another episode of Goldman Sachs Exchange's Great Investors. I'm Alison Mass, Chairman of Investment Banking in Goldman Sachs' Global Banking and Markets Group, and your host for this episode. Today, I'm very excited to be sitting down with Alan Waxman. Alan is the co-founding partner, chief executive officer, and co-chief investment officer at Sixth Street, a multi-strat private capital investing firm with over$115 billion in assets under management. Founded in 2009, Sixth Street focuses on identifying the best relative risk-reward across asset classes, industries, and geographies.

0:44The firm works as one team and partners with leading founders, management teams, and companies to deliver creative and flexible long-term capital solutions. Before that, he was a partner here at Goldman Sachs, becoming a partner at age 31, and he led what was then called our America's Special Situations Group. I'm excited to talk to Alan about his incredible career path, the opportunities for investors today, and how the investment management business could change in the years ahead.

1:17So, Alan, welcome to Great Investors. Thank you for having me. It's going to be fun. I'm excited. So, good. So, I want to start by talking about your path into finance to begin with, before we even get to Goldman Sachs. What interested you in coming into the finance industry? The path for me to finance was not linear. I was an international relations major in college. And I graduated college with, I didn't have a job. So I had 35 interviews, four of which, by the way, were different groups at Goldman Sachs. Didn't get called back once. And - That was our loss. Yeah, it's all good. and built some resilience, but I ended up getting a job at a long bond manager called Fisher, Francis, Trees, and Watts as a client service analyst.

2:08And really what that was, the jobs to do stuff helping clients, but really what it was, I was in the mailroom punching books. So that wasn't that cool because all my friends were out who all had jobs, by the way, before they graduated and they were out looking, doing cool things, visiting companies, worrying about companies. So I started studying for the CFA just to learn some basic finance principles and corporate finance. And then I was coming on an airplane back from Texas and I met a former Goldman Sachs partner, Jody Wanassa, who was sitting next to me. And we started talking and rapping and I started asking lots of questions and we built a relationship and And he basically got me an interview at, you know, I think was one of the most exciting groups to come into in Goldman Sachs over the last 25 years, which was the predecessor to the special situations group.

3:02But it was not a linear path. It's just amazing how so many of these connections are just fortuitous. You happen to be sitting next to him on an airplane. So at that time, what was the mandate of the special situations group? And how did that influence the type of opportunities that you pursued back then? I think Goldman figured out very early that, starting really in 2001, 2002, that that piece of change in the world was accelerating. It obviously started with the internet, then it went to social media, then AI. So the mandate was basically complete flexibility, but you couldn't lose money. So we invested in real estate assets, infrastructure assets, direct lending, private equity.

3:41We started a company from scratch, which ended up being one of the second largest wind companies ever sold at that time. So it was complete flexibility, but all with the principle of, again, diversified portfolio, yield. We like to have a little bit of yield, and we wanted that convexity. And again, we needed to protect capital. So you became a partner at Goldman in 2006 at the age of 31. You were a great firm leader throughout the financial crisis. So what did that period teach you about how capital behaves under stress? And how did that shape your approach to risk return today? The GFC had a lot of learnings.

4:20It was about avoiding fiefdoms and silos, number one. Number two is avoiding tunnel investing. And I'll talk about what that is. And number three is mismatched assets and liabilities. So the first learning is, and this is something we learned at Goldman back in 2001, 2002, too, but when you look at the people that lost a lot of money and made a lot of mistakes, is they were in organizations where people weren't speaking to each other. They weren't sharing ideas. They weren't comparing relative risk units and return units. There was just no collaboration. And when things are going well, it's all good.

4:55And you don't see the importance of teamwork and avoiding fiefdoms and silos. But in GFC, you saw a number of firms break down because people didn't talk to each other for whatever reason. The second thing is tunnel investing. And we saw this, and this is what really allowed us to navigate the GFC. Because we're a multi-strategy private capital investing group, we saw what was happening in housing. It was just getting crazy, 105 % loan-to-value loans. The appraisals were completely elevated. There was clearly a ticking time bomb happening over there, particularly on the housing side. And that allowed us to really manage risk and be very selective in what we did leading up to that.

5:35We started seeing that in about October 2006. There's a lot of stuff we missed because it obviously went on further. But again, the whole idea of the tunnel invest, if you don't have the capabilities like we did, like we do at Sixth Street, where you can see a bunch of different ecosystems, really understand what's happening. It's really hard. And you just keep doing things without recognition what's right in front of you if you're one of these ecosystems. And then the last thing, and there's also something that I learned from David Vineyard, is he always talked about early in my career, he always talked about crises.

6:07He still says it to me today, but he always said, at a very young age, he always said, crises never happen because of credit issues. They happen because of liquidity issues. And really what he's talking about is mismatched assets and liabilities. And the thing with mismatched assets and liabilities, which there are a lot during the GFC, you had hedge funds, investing long, borrowing short, didn't work. You obviously had a number of banks doing that. But the thing about mismatched assets and liabilities, there's a pattern across all these crises. But what happens is human beings, they really remember when the crisis happens and right after it.

6:41Then they kind of remember. Then they don't remember. Then they completely forget. And then they keep mismatching assets and liabilities. And that's generally, you never know what ecosystem the mismatched assets and liabilities are going to be. But that's where the crisis is going to be. So it's really those really three things that are lessons that are, I don't think they're just about the GFC. I think they're just lessons of being a great investor. not only within your partner group, but also having your whole firm understand that. That's why we talk about a lot of these lessons from 0102, GFC, obviously COVID, there are a lot of lessons, but that's a pretty well patterned sort of recognition of how to navigate and also how to early identify the next, where the next crisis might be.

7:25There are a lot of lessons out of that financial crisis. I remember our senior leadership at the time saying, if we didn't have a culture of escalating things and elevation, who knows what could have happened to our firm. Yeah. I remember when I first joined Goldman Sachs and Hank Paulson, we went to this young leadership thing and he talked about the culture for a long time. But one of the things he always talked about is you got to elevate risk early. And that's something at Sixth Street, we talk about the same verbiage of that all the time. It's like, otherwise you're just, you're kind of blind.

7:55So getting your junior people, getting your middle-level people to escalate things early. Bad news travels faster than good news. And I think that's, again, that's being an investor, being a good risk manager, and really just creating that culture. And you have a culture of rewarding people for doing that as opposed to, you know, people feeling they should stick things in the drawer and not tell people. So I want to talk about Sixth Street. What was the original vision and how has it evolved over the last 16 years? We wanted to build a firm from day one that was built for the changing, accelerated pace of change happening in the world.

8:34And it really started back in 2001, 2002 with the internet expansion, number one. And number two is we wanted to build a firm because we thought this delivered the best outcomes for our investors of no fiefdoms, no silos, no politics, no BS, a bunch of people that are over themselves so that they can be good teammates. And those are the two things that we set on doing from day one purpose built for that. And really where that came from, the idea of that and the foundation of that came from warnings I had here at Goldman during the 2001-2002 telecom bus recession back then for all the people that weren't alive for or lived through the 2001-2002 recession.

9:20So I was an analyst. I was covering, you know, we covered all kinds of sectors, but I took an interest in all All the fiber cables that were being laid underneath the soil in the U.S., underneath oceans, which, by the way, is a lot of the backbone for data transmission today, hundreds of thousands of miles were laid. And I remember very specifically thinking and actually talking about with some of my colleagues that the only thing that is constant is change and the world is about to get a lot faster. And by the way, that's only accelerated over the last 25 years. But that really is one of the most profound learnings I had from Goldman that sort of created the idea of 6th Street.

9:59The second one is I was on. So our group forgot what it was called back at that time. It changed names like five different times. But we were on the 27th floor. And because we thought. At 85 Broad. This is at 85 Broad. So the old building. I still have, you know, lots of vivid memories. A lot of my business childhood grew up there. But we were on the 27th floor, and we had taken a view that just, look, the internet was growing, but the capital, we didn't think it would earn a return. We didn't think it would lose as much as it did, but we didn't think it would make a return, so we didn't do anything on the 27th floor.

10:43And then on the 28th floor, they took, again, really smart people. they took a positive view and kind of made a pretty big bet. And that was a really a microcosm at Goldman back then where there were a lot of fiefdoms and silos. So there were at the time, going back to pre-telecom bust, there were 10 different literally principal investing businesses, all investing off the firm's balance sheet, all run by different partners, none of them talking to each other, not sharing ideas, sharing relationships, comparing relative risk award, talking about value creation, sharing. That just didn't exist.

11:17It was set up in a very siloed and fiefdom way. And fast forward through the telecom bus, guess what? Some of those groups did really well and some of them lost a lot of money. And at the time, people kind of said, this makes no sense. And let's put all these 10 fiefdoms under one umbrella from one that's going to create better opportunities, better relationship sharing. It's just a better way to run a multi-strategy private capital business. So that's what became the special situations group right after the telecom bus. But that learning of just, you cannot be a multi-strategy private capital business with fiefdoms and silos.

11:54You cannot be a multi-strategy private capital business if you don't have a culture that's just constant. We call it tennis at Sixth Street, constant idea sharing, relationship sharing. Volleying back and forth. We've been doing tennis, and really, since the last, it's all I've done, and that's a key word at Sixth Street, is playing tennis with each other. And those values are still the same so that every muscle fiber, every DNA strand, the way people work, when we're interviewing people, the way everything happens, our processes, our incentive systems, all are designed to be able to do just that, which is to be able to the skill set of comparing relative risk units and return units with no fiefdoms or no silos.

12:33That's literally what this firm was built for. And that was true when we founded the firm. Again, all learned here at Goldman, and that's true today. So you were talking about your investment strategies, but you're known also for your flexible approach, especially through your Tau strategy. So can you tell us how you've structured the firm so that you can, quote, go anywhere? Sure. So just for your listeners, Tau is our$30 billion cross-platform investing vehicle that encompasses everything that Sixth Street does. So across all our 10 asset classes, all our geographies, our 16 sector teams. Like that is TAL.

13:11So migrating to the best risk award because our belief is that because the world's changing so fast going back to what started in 0102, you have a theme, it's got a shelf life of 12 months to 36 months, you have to constantly migrate. But that is sort of what TAL is. It's our$30 billion cross-platform investing vehicle. And the idea of TAL was really about, really three things. We really first started talking about this with our LPs. They saw that we had a yield. What we had done at Goldman Sachs, how do we recreate that in an LP ecosystem where the LP ecosystem at the time, particularly 2009, and that's changed a lot, was very siloed itself.

13:49So you had your private equity team, you had your real estate team, you had your infrastructure team. In a lot of cases, they weren't really talking to each other. So that was kind of the first thing. how do we synthetically recreate the balance sheet that we had at Goldman with the flexibility we had at Goldman? The second thing is that we studied when we were thinking about writing the business plan, we studied the idea that a lot of GPs, the reason why they had faltered is because they keep raising larger and larger funds, irrespective of the opportunity set. Because they can. Because they can.

14:23And by the way, it's a great point. So Jamie Gates, who's one of the co-founders of Sixth Street. We call him the godfather of Sixth Street. He said, and this is one thing he imprinted in me from literally the first time I met him, first time I met him, he said, just because you can raise capital doesn't mean you should, if you want to be an investor first firm. So that was the thing is that we wanted to set an architecture up where we didn't have that pressure. We didn't want to feel that pressure to invest. We wanted to feel that pressure to raise bigger, bigger funds. But, and this gets to the third thing we're trying to solve, we'd still wanted to be able to do billion dollar, three billion dollar deals and consistently underwrite those across our asset classes.

15:03But if you have a three billion dollar fund, because that's the right size opportunity for your growth business, you're not going to put a billion dollar check in that. So having TAL on top of all of our strategy funds, that enables an investor first architecture. How does that work from an LP perspective? Look, the LPs that invest with us, they have the worldview that we have, which is, and again, I'm just going to come back to it again, because I think it's something our industry does not fully appreciate, which is the pace of change in the world is accelerating. So our whole firm was basically built for that.

15:40And I think the LPs that have invested us with Intel, and by the way, our whole firm, because all of our strategy funds, they're incredibly flexible. It's like our Our real estate business, and by the way, I think this is one of the things that got the real estate ecosystem in trouble. Real estate's very siloed. They have a multifamily fund, or they have a hospitality fund, or they have this fund or that fund. Our real estate, complete flexibility. We can do anything. We'll buy assets. We'll lend you money. We'll do pref. We'll do joint ventures. Single assets. Complete flexibility. Because that's where we think the alpha is.

16:11So I think the world is sort of headed that direction. But our LPs, the ones that invest with us, they have that same worldview. And literally at one of our first meetings, when I go back, you got to remember when we came out of Goldman where we had complete flexibility and you go to an LP system that's very siloed and I'm explaining our strategy, they literally looked at us like we had three heads. Like literally we had a hard time. An LP who had only done private equity or only done it from - Because they say you don't fit in one of our baskets. Right, right. You don't fit. So we had a choice to basically stay true to who we are as investors, which is this multi-strategy, private capital, complete flexibility, migrating to the best risk word, thinking about the skill set of unitizing risk units and return units, everything we had learned at Goldman Sachs, or take the easy road and just raise one of these very narrow strategy, what we call tunnel funds.

17:05And what we said, we made a decision, we're going to stick to who we are. And I literally used to say to people, I said, listen, because that was the question every meeting we went to, which we had a really hard time raising money in the beginning. Every man would say, well, how do you do that? And when I said, I said, listen, if you don't think we can do this, you should not invest with us. Now, that doesn't happen more occasionally when there's like a new LP. I'll get that question. I tell him the same thing. Let's say, if you don't think we can do this, because this is all we know. So this is how we built.

17:33Literally, the purpose of our firm is to be able to do this. If you don't think we can do this, you should not invest with us. But all of our investors now, we have obviously a lot of LPs today. They've all bought into this worldview. And I think the industry itself is actually moving in that direction. I think the days of the big personality or the smartest person in the room, or you can operate in tunnel funds or not have a lot of capability, I think those days are giving the pace of change in the world. it's going to be really hard to navigate. You look at direct lending. Direct lending, everyone said this is going to be the golden air in 2022.

18:08Really smart people. But the golden air lasted 14 months. What's the takeaway? The takeaway is I think there's an underestimation of how quickly the pace of change in the world is. And there's other examples for that. So anyways, the LPs that invest with us, they share that worldview. And I think there's an increasing amount of them that are coming to this view because they're seeing it, they're feeling it, but that's how they feel about it. So with respect to the strategy, the Tao strategy, do you have a favorite investment or an example that epitomizes that approach? Something you were able to do that you would not have been able to do without it?

18:45There's not one investment, but I'd say there's a type of investment that's my favorite. And the type of investment that is my favorite is when we're bringing 50, 60 people across the firm, different sectors, different asset classes, and they're all working together. So early on in 6th Street, one of the first things we did is we bought a portfolio from Lloyds Bank, 38 companies. It had some debt. It had private equity. It had real estate. Literally over multiple weekends, like 50 people all working together. Credit Suisse, we bought a portfolio from Credit Suisse, about 200 positions. They're a big principle that I think is over a billion dollar portfolio.

19:23Again, that one, because there's more positions, we had literally like 75 people working weekends. We're all working together, sharing ideas, comparing relative risk units and return units, constantly doing it. Love that. You know, Airbnb, like during the COVID crisis, we literally, because they had, the world was, you know, almost ending or people thought it was that we had to get stuff done quickly. We had a team in US, Europe, and Asia, all working 24 seven, literally around the clock. just handing over stuff to meet the timeframe for what the company needed. And most recently, Edge Connects.

19:56We had our power team, our data comps team, and our real estate team, our infrastructure team, all working together. Again, so it's more of a type of deal than a favorite deal. But it's like when you see the true power of the firm and how our culture works in practice, those are the types of deals that get me most excited. So looking across the marketplace, Where are you seeing the most compelling opportunities right now? I would say real estate and AI, I'd say the most compelling opportunities, but also represent real risk. I think just in general in real estate, the whole, because of the vintages that got done between 2019 and 22, they're sort of stuck.

20:38The recapitalization that needs to take place in the whole real estate ecosystem is massive. You know, specifically, look, affordable housing, I think this is a risk to society, economy, political environment, but affordable housing, it's the biggest supply demand dislocation out there. There's 7 million unit shortage of affordable housing units. 49 % of the renters are cost burdened, so they're stressed. And it's a real problem. I think we can all agree everyone should be able to afford a house without being stressed with families. And that's just too big a number for the number, just how big the housing market is.

21:15So I think that's a real opportunity in affordable housing, but there's others across the whole ecosystem. But again, I think you got to have a clean portfolio, which fortunately we do because we didn't do anything from 2019 to 2022. We did about 10 % of what we usually do in our real estate investing activity, because again, this goes to the power of sharing ideas and comparing relative risk units and returns is that the real estate from 19 to 2022, it just didn't make sense, which is why we didn't do a lot. I think our average investing was like less than$250 million. And we typically invest like two and a half to$3 billion.

21:49So look, I think that's a risk, but also a real opportunity. AI, I think there's, we love change in the amount of dispersion that's going to happen in AI. Just good business models, not good business models across every sector. Like we like that because it gets down to really the skill set of, again, bottoms up fundamental analysis, but also the skill set of comparing across a bunch of different ecosystems. I think those two are, I think those are very issuing opportunities. Yep, I agree. So I want to talk about investing in sports because you've been ahead of the curve in investing in sports.

22:27For instance, you did one of the first NBA deals with the Spurs in 2021, and you forged partnerships with both FC Barcelona and Real Madrid in 2022. So what drove that focus and how has the opportunity set evolved? Look, sports was always on our thematic radar because sports teams, sports leagues, good market position, I think technologically, just the local to global, the fact that sports bring people together. So it's always been our thematic radar, but it's never been actionable. So it's never made it to our top 15 to 25 themes. Now, obviously, when COVID happened, when one of the principal revenue streams of these sports teams is people going to games and when people don't show up, that obviously had a big impact because of what was happening in COVID.

23:15So that really started to open the door that there might be a change to allow for institutional investors to invest, which pre-COVID, as an institutional investor, wasn't really available. So it wasn't really actionable. And look, we didn't know. We thought it would happen. We didn't know. And then all of a sudden we started to hear that the NBA, other leagues around the world, and they were open to more flexible capital. That's when we started to get focused and it sort of went up our thematic priority list. And, you know, obviously you mentioned the San Antonio Spurs, literally, which we've had a thesis on the San Antonio Spurs for a long time because 6th Street, the original cultural foundation, a lot of the inspiration was from the San Antonio Spurs.

23:59Like if you go to our original offsite, like our first sets of off sites, we have a lot of quotes of Coach Popovich and things the Spurs say, like they just were real cultural inspiration about teamwork. So that was always on the radar for that. But also just because we had a view that San Antonio could be, it's considered a mid-market team. But we thought because San Antonio and Austin were coming together, it could become a major market team over time. So again, but it wasn't actionable. It literally wasn't actionable. And then all of a sudden COVID happened, NBA changed the rules. And that's when we cold called the Spurs, got in dialogue with them.

24:35And that was one of the first NBA deals that were done. The whole sports ecosystem, we were there early. Now there's, I think, a lot more entrance. I mean, it's every day I wake up and there's a new person raising a sports fund. And there's a lot of people interested in sports. Firms dedicated to sports. It wasn't like that when we first started. I think the way we're positioned where we are trying to be the partner of choice for the best global sports brands in the world. And when you look at, you mentioned FC Barcelona, Real Madrid, we're partners with the Dallas Cowboys, New York Yankees, San Francisco Giants, San Antonio Spurs, BFC, Boston Celtics, which is our most recent example.

25:12We're positioned in a way where because we've had a thesis on not just sports, but the best global brands in sports, because we think These are consumer opportunities, like our lens that are local to global, enabled by technology. That's kind of the way we position ourselves. So we feel like we're in a pretty good position, despite the fact a lot of people are coming in. And then again, going to very similar like real estate, the way we approach the real estate space was with complete flexibility, because that's how we think you keep loss rates low, but also find the best opportunities. that same philosophy we have, by the way, not just in sports and real estate across everything we do, but in our sports space, every deal we've done in sports is different.