What Do You Call an Institution That Can Play Anywhere in the Capital Stack? With Sixth Street’s Co-CIO & Co-President Julian Salisbury

24:28Businesses that were going through some kind of tradition, transition or a carve out, for example, from a conglomerate. And that allowed the facilitation of larger funds that emerged to feed the kind of demand for private credit. Big picture, though, when I take a step back, what's attractive to us about Europe is, you know, the fact that you have a less liquid functioning public capital markets and the fact that you have, whilst you have competition here it's a lower level of competition that you have in the u.s and then you add to that just the complexity of what of working across different jurisdictions

25:03Julian Salisbury:and would it be too simple to say that the current blockages in the private asset sort of pipes um is more pronounced when it when you look at the u.s than it is in europe because europe is more nascent um or is that too simple when you say blockages you're talking about like the the noise in the... Well, deals that haven't, you know, come to fruition, you know, funds that are, you know, swapping assets between funds and exits that have been delayed. Yeah, so, I mean, look, in the US, what you've seen, I would say it's more pronounced in the US at least, is this evolution of the retail market and that really changed things.

25:45If you go back, if you think about private credit from its inception, The early backers of this were the endowments. Going back to the 80s, you saw some sovereign wealth start to come in thereafter when they saw the returns that were available to them. But it remained relatively nascent. Then you started to see post-financial crisis as the banks pulled back. Insurance companies start to step in. That was a very natural evolution because bond yields were close to zero. The insurance companies couldn't earn a rate of return on their assets to match against their liabilities. So that started pushing them into private credit to earn some excess return, some liquidity premium.

26:25But then really going back about five, six years ago, you saw this emergence of the retail trend. And if you look at how those vehicles were designed, I mean, they were designed as well as they could be given the regulatory rules. But there was a necessity for these things to provide liquidity to investors. investors were giving the feedback that they didn't necessarily want to invest in a drawdown fund and deal with all these capital calls and the complicated tax reporting associated with doing that they wanted to have a vehicle that they could fully fund up front get you know simple tax reporting and um oh and the semblance of some kind of liquidity and what that resulted in again with bond yields still being relatively low at that time was a was just a rush of money coming into these vehicles.

27:14And the way it works is that once that money comes into those funds, it has to be invested pretty much immediately. Otherwise, it starts acting as a drag on the returns for those funds. So managing, it's the oldest problem in finance, managing asset liability mismatches. And people often talk about the outflow risk on these funds. As big an issue as the inflow. I mean, when you've got just this money coming in every month, every quarter, it has to be put up. That's a challenge. And then that's kind of faced some stresses in recent months and quarters, most pronounced in the US. And I think what you've seen as a result of that is just a pullback.

27:55What's interesting is that the markets have been surprisingly functional. Like, it's not like there's some massive risk repricing, you know, despite a lot of the, you know, sensational headlines. What we've seen is, as those retail flows have moderated, that the people who were investing that capital have just, you know, they're a little bit more willing to negotiate tougher terms on documentation. Their sizes may be a little lower than they would have been, you know, a few months ago. Pricings may be backed up 25, 50 basis points. But it's actually been quite orderly.

28:31Julian Salisbury:Yes. It was Mark Carney who was in front of the parliamentary committee after the Woodford meltdown where he said, you know, these funds are built on a lie and that classic sort of that classic mismatch that you've talked about. Take us far fast forward five to 10 years. What does the private markets universe look like? So today you have a hundred trillion dollars plus of savers, individual savers who want to have access to the excess returns that have been experienced in private markets over the last couple of decades. But those same individual investors want to have a daily mark and they want to have daily liquidity and they want to have like very clean reporting.

29:18And those things are somewhat at odds. Part of the reason you've been able to generate those historic returns is because of that you were getting paid a complexity premium, an illiquidity premium. That's how you generated the return as you scale and um as you scale these investments and you know it's necessarily going to compress and erode that alpha over time it it just it just is um so i i think that individual investors have to think about this from a from a trade-off perspective of course you know do i do i do i want that truly liquid thing or am i willing to actually accept a lower level of liquidity of the fund that I'm investing in, knowing that that will enable the investors of that capital to be able to, A, be more patient when things are too tight, and B, have the ability to confidently lean in when the markets are dislocated.

30:20So I think that this is going to be a constant kind of evolution of the industry. Look, here's what's clear. today you know the most sophisticated family offices are like 50 percent alts allocations you know big institutional investors 25 percent 30 percent alts allocations mass market individual investors less than one percent alts allocation there there is a there's a want and a need and a demand to have this like democratization of alternatives but i think you know people have to understand and expect that there's a trade-off the more liquid and the more plain vanilla the thing they're investing into is the harder it's going to be to generate true excess returns

31:03Julian Salisbury:um so i am intrigued because your expression complexity premium i think is is is well made because we talked about the liquidity premium david swenson articulated so well in pioneering portfolio management and the work that he did at yale now we're seeing yale and other endowments pull back from their private market allocations, courtesy of a number of things. But where, as you look around the financing that's going to be required, do you specifically feel that that complexity premium will be rewarded? Look, there's a spectrum, right? If you look at the investment industry overall, and as a continuum, Anyway, at one end, you have only treasuries, money market funds, core fixed income.

31:51It's a scale game. There's not a lot of, there's operational complexity in delivering that. But in terms of the core product, it's relatively simple. And at the other end, I would say is control, true control private equity where you are driving, It's the most active form of active management where you are driving the earnings creation, the revenue growth of that underlying business. And everything else sits on a continuum in between. And that truly the scaled lower touch stuff is going to get gradually commoditized more and more over time. And it's all going, everything. You know this in the financial services industry.

32:34buying a bank loan in you in europe used to be a special situation like 20 years ago like it was just it was a novel concept that's become so what what was yesterday's special situation becomes like the common thread of the day and then you have to keep evolving and changing but on that continuum you know i think the the higher touch control private equity more opportunistic credit more complicated credit underwritings is where you're going to be able to maintain some, you know, negotiating leverage. And, you know, you think about it in what's happened in equities. You have equity funds now that charge zero and, you know, the firm makes money on the stock borrow.

33:18I mean, and so you can see certain aspects of like plain vanilla, large cap Duran lending, some of the very, very simpler to deliver private IG that you'll see some erosion of alpha over time most quickly there.

33:33Julian Salisbury:And when we talk about these dislocations, Victor Kozler of Strategic Value Partners, who has been on, I think we're going to have him back on because he's sort of licking his lips and saying that some of the opportunities are as great as they were after the great financial crisis already 18 years ago. Do you think that's, Do you see these opportunities growing in numbers or do you think that there's maybe some exuberance that maybe is overstated? So, first of all, the market structure is so different today than it was back then when the financial crisis hit, certainly here in Europe in 2008, where I was based at the time.

34:13The banks were all on their back. The hedge funds were all on their back. many of the private equity firms were just in damage limitation mode. The number of people with available dry powder to go and take advantage of what was going on at that time was very, very limited, very limited. And I think today, every time there's some kind of event, whether it's COVID or Liberation Day, you quickly, within a relatively short period of time, realize that there are reasonably large amounts of pools of dry powder out there to step in when these things emerge. So I think that, you know, and also when I think about distressed situations, you know, I think there will be, there are so many kind of capital solutions, providers that will come in before you actually have like an uncontrolled kind of bankruptcy situation, that the people that will be able to take best advantage of some of those stresses and dislocations aren't necessarily people buying bonds or loans in the secondary market.

35:19It's who can show up and write a large check to fix the capital of the structure in partnership with the company. So I think that will be the more scalable, repeatable opportunity. The best distressed opportunities are typically great big companies that have large over-levered balance sheets. It's a kind of good company, bad balance sheet, and it's scaled. And you can sometimes buy those things, and those can be great investments. But the kind of small company loan-to-own strategies, it's a very high-touch, hard-scale business.

35:57Julian Salisbury:So I want to talk about one specific industry. If we can call it an investing industry, that's sports. We've done a couple of them. We had Arctos. Then at the Money Mays Allocated Summit, we had our whole session on the investment. in sport i mean i read that you know you have investments in sport i think you've done uh you know several um including one alongside michael dell in san antonio spurs however talk to me about what you see as the opportunity set in the sports segment yeah so a couple of things first of all the interest in sports you think about like what do you watch on tv what live tv do you watch today I mean, personally, the only live TV I watch is sports.

36:39I mean, with streaming and increasingly, you know, you can have four people in a family all sitting there on their iPads in four different rooms watching four different stream TV shows. Sports is one of the few real live events that attracts not just individuals but families to get together and sit in front of the screen. So from an advertising value perspective, these things are hugely valuable and increasingly valuable. Second, if you think about, you know, one of the big questions people are asking today as it relates to AI is how is it going to disrupt this business? And you could construct bull cases and bear cases for pretty much any company or industry out there.

37:16You know, there aren't many businesses you can look at them and go, I have a high degree of confidence that business is going to be doing what it is today, more or less, 20 years from now. Right. I mean, you think about the mega cap tech giants. You know, what are the chances that they look like they look like today, 10, 20 years from now? By then, they could have been broken up by regulation. They could have been forced to merge. They could have been, you know, you've seen that interesting chart, right, where you show the cap, the market cap of the, you know, the top 50 companies and how that evolves and changes over time.

37:48So that kind of durability and defensibility is good. So I think as a theme, as an asset class, it's growing. The economics are clear. You look at the growing kind of rights associated with these sports, they just step up every few years. American football being by far the biggest, but that has a trickle-down effect into other professional sports, also college sports. Even youth sports now is becoming a lot of money coming into that space, which isn't always straightforward. would. And then the other thing I would say for these businesses, the way we've approached sports, I think some people are confused and they think, oh, it's just some like crazy rich guy who wants to own a piece of a sports team for the sake of it.

38:32Not so crazy. First of all, these things have been great assets to own over the last few decades. People have understood the long term durability and the long term economic value of them through the increasing media rights. But also when we invest in sports, it's not necessarily just taking a stake in a sports team. that investment could take many different forms. In the case of Real Madrid, you know, our partnership there, we actually provided capital to refurbish the Bernabeu Stadium, which enables them to not only play great football matches, but also move the pitch out and run live events and music in the stadium.

39:08And we have a revenue share of the stadium off the back of it. In the case of Barcelona, you know, they entered into a new media deal for their domestic rights. we bought a share of their rights. So they have a long-term media rights deal and we agreed to upfront pay them for a share of that to enable them to invest in the team. So we're now benefiting from the long-term media value of the Barcelona franchise. In the case of other investments we've made in the US, like the Boston Celtics, and then in the case of Bay Area Football Club, which is, at the time we made it, I think it was the largest ever investment in a professional women's soccer team in the US as an expansion team for the WSL.

39:50That's really a control investment. We own the whole team. So they've taken many different forms depending on where we see the best value. By the way, interesting fact, I think we had 50 ,000 people show up to a game a few months ago for the Bay Area football club.

40:05Julian Salisbury:That's very clearly expressed. And we had John Imadil co-interview the episode on Saudi sports. And as he said, the other great thing we should never forget is that we don't know the end result of these games, which of course is captive. And as you mentioned, And it's only because an ex-colleague of yours from Goldman's, Bobby Valdral, the macro commentator, in the context of these AI companies and the investments, he says, I like his expression, I'm going to say it, AI capex, never have so few spent so much so fast. Right. Dot, dot, dot. Yes. I'm going to move to some variety of quickfire questions.

40:40Julian Salisbury:Yeah. So in Sixth Weeks activities, a lot of what you do isn't constrained by traditional fund structure. I wonder how you think about risk in that context. Yeah, so it's a great question. We're very privileged that our LPs, our capital partners, give us that flexibility. They trust us with that flexibility. We have to make sure we use it well. I would say for all of the funds that we invest out of, we have target rates of returns that we're trying to hit. We have target money multiples that we're trying to hit. They have an expectation about the approximate aggregate kind of level of credit versus more equity type risk that we'll make as we're investing that capital.

41:28So, you know, so we're bearing all of that in mind. But look, for us, it's like, how do we achieve at least a certain rate of return to hit those minimum thresholds whilst taking the least amount of risk? And people throw out this term, good risk-adjusted return, without being disciplined about it. Really saying, okay, what are the benchmarks? What are the public market? If I didn't do this, what would I do? Can I demonstrate on a like-for-like basis that I am earning some kind of premium?

42:00Julian Salisbury:Where in the capital stack are you being paid most for complexity today? I think at this exact moment in time where we're seeing a lot of opportunity is around this theme of stuck private assets. So it's often asset owners, private equity owners, growth equity owners, could be infra or real estate. it applies equally across all of them, I would say, where they have a need to raise some kind of pref equity, subordinated debt, or common equity capital to help them deleverage the business. The reason for this is, there's a whole vintage of assets that were purchased in a period of time when interest rates were very low, when financing was freely available.

42:47People paid reasonably high prices. In some cases, they may have then been hit by earnings during COVID. And if you think about missing out on three, six, nine, 12 months of revenues in that period of time, that was enough to leave a company more leveraged than was probably comfortable. So I would say a lot of both private equity firms and real estate people did a very good job terming out those capital structures when interest rates were very low in 2020 and 2021. So they've had the time. But now as those debt maturities start reaching, in some cases, they still haven't grown the company enough to generate the return they want for their investors.

43:28In some cases, they haven't been able to pay down debt enough in order to be able to refinance in the regular way capital markets. So we're having a lot of very productive conversations with asset owners where we come in and be a solutions provider. and it could be pay down the debt so they can term out the cash pay debt in the capital markets. It could be provide them some DPI because they're all under pressure to return some of the capital to their investors. It could be provide them primary capital to help them grow the business so that they can actually grow back into the capital structure and generate a higher rate of return.

44:05So it's that kind of complexity. Capital solutions providers is a pretty rich theme for us right now. Another area where we've seen a lot of activity is on the ABF side, on the asset-based finance or private IG side of the business, where there's been an increasing amount of both demand from insurance companies in particular looking to earn a liquidity premium or a complexity premium above what they can earn in the public bond markets. And what's interesting about that space, you know, there's a lot of chatter around ABF and like people trying to reinvent themselves as ABF specialists after the fact.

44:51It's actually quite a specialist area. It's one of the more operationally complex areas of investing, right? It's not like buying a bond or buying a QCIP or even making a single investment in a company. It's entering into partnerships with a bank to buy millions of loans on a forward flow basis or buying a portfolio of hundreds of thousands of loans or, you know, tranching up a pool of existing assets into five different flavors in order to sell off to different pools of capital. There's a real kind of operational and complexity barrier to entry. It's a bit of a scale game, frankly, in the ABF market.

45:27So that's another area where we've seen a lot of activity recently.

45:31Julian Salisbury:and finally uh large firms huge explosion in sort of asset gathering you're at the smaller end of these behemoths yeah culture as you grow what do you think is the biggest challenge and what having seen growth successfully executed at Goldman Sachs what have you taken and what do you most want to I suppose, infuse into the culture? There's two things. One, look, I think of it as we're plowing this path of executing on our business where there's a danger if you become ill-disciplined about the type of money you raise that you find yourself under pressure to invest more capital than is prudent and this is going to degrade returns.

46:16Essentially, you become like a factory where you're just churning out product. And I've seen many examples of this in public markets and increasingly now in private markets where organizations are turning from being investment firms to being sales-led organizations. But there were big, important, relevant institutions 10, 15 years ago that have failed to keep pace. They failed to keep pace in terms of the ability to provide scaled capital solutions to companies. They failed in their ability to be of a size relevance to the biggest institutional investors in the world. It's becoming increasingly hard to just get a meeting with the biggest allocators of capital.

46:54So if you're running some little fund, you can forget about getting access. Getting access to insurance company balance sheet, getting access to retail funds for those that want to do that, it all necessitates a certain minimum viable scale, essentially. So you're kind of plowing this, you're kind of traveling this road where there's a danger I get too big and I lose discipline over investing, but there's a danger of relevance. And how do you keep that balance right? And look, and our view on this is the way you keep that balance right is you maintain real clarity around what's your North Star.

47:25And our North Star is delivering great outcome for our investors. If you're sitting inside a six-year, you don't hear people talk about AUM targets. It's just not. I think it's an unhelpful metric. It's something that gets forced upon you by the public markets, sometimes perceived as a leading indicator of management fee growth. We think about it as what capabilities do we need to add? people, platforms, liability structures in order to fulfill our mission of being able to attack any theme or dislocation anywhere in the world. So that's what really drives how we think.

47:59Julian Salisbury:That's a clear summary of how you operate. For closing questions, we ran into a former intern the other week and he said, Simon, you didn't ask the question about advice for youth in your last two interviews. He's like, no, you're absolutely right, I forgot. So I'm going to ask you, you know, lots of youth out there thinking about finance and complexity and AI and all the rest of it. You know, what piece of advice do you give to a young person thinking about a career in finance? Yeah. I mean, look, there's a lot of things that spring to mind. But one, you've got to be a constant learner. I mean, I spend hours every day reading, listening to podcasts and not just in my area of focus at that point in time.

48:42It's the industry is evolving. And if you're doing the same thing today, two years from now, you probably lost. So I think constantly learning, constantly evolving. And especially when you hear things like, oh, that's crazy. I would like, why are people doing that? You hear this term, all these guys are crazy. That makes no sense. No sense. Go and figure out why they did what they did because it often makes more sense than you might think. So this like you have to be a constant lifelong learner. the great news on this today is the resources available to do that have never been better right you want to learn you know you want to create yourself a you can create yourself a podcast using ai now say build me a 30 minute podcast i can listen to on the way home tomorrow to teach me about this niche area within finance done um i'd say the second thing is you got to treat this like a competitive sport it's it's you know people for for those that have ever done high level sport they know their how how hard it is to win the discipline the consistency and that that discipline and consistency in terms of pushing yourself combined with be a constant learner people talk about the power of compounding capital like people should focus on how do they compound themselves they compound themselves through learning consistently but also holding themselves to account measuring their own kind of are you really and it's not about doing a you know crazy hours every single week it's it's but it's like am i making an impact at work am i succeeding and if not how do i make myself better very clear you're giving me a lovely

50:16Julian Salisbury:tee up for on our website is money maze learn and every one of our podcasts is broken down in industry categories it's free as how mark said it's the right price um and uh and you for young people looking at industry segments etc it's it's great we all in our careers have the wind in our face and having to deal with stuff that we wouldn't like to deal with when when you've had episodes like that what advice would you reflect on grit and resilience is is is a hugely valuable trait the best athletes you know i think roger federer only won 52 of his points right so it's it's that resilience and grit to kind of really dig in and um and and and also engage with other people and seek help in terms of how to see a resolution to the problem inaction is not some people get paralyzed when there's a problem and what you have to do is think about you know how do i get from a to b and it can seem like an insurmountable challenge at times an insurmountable challenge and all you can do is put one foot in front of the other well look i'm going to sum up here because um yours is a business i really didn't know anything about until you know we got into conversation and uh and i started to understand it but i'm going to take away three particular things, which is your term, and I like it, is that if you're going to be paid for what maybe was once referred to as the liquidity premium, it's morphing into the complexity premium.

51:41Julian Salisbury:Number two is that yesterday's what we call special situations are normally, well, now today, pretty plain vanilla. So we continue to advance and more is required of us. And that actually of all the sort of the lending and capital provision opportunities, opportunities, good big companies that have poor balance sheets continue to represent, you know, ongoing opportunities. And finally, I'm going to take that great last piece of advice, young people, and not just young people looking at myself, be a learner and continue to be a learner. If not, dot, dot, dot. Julian, it's been lovely having you here today.

52:17Great to be here. Thank you.