Invest Like the Best with Patrick O'Shaughnessy
Alan Waxman - Private Credit and the Modern Financial System - [Invest Like the Best, EP.466]
· Summarized
Key takeaways
- The roots of current financial market issues trace back to systemic incentives and the evolution of regulatory guardrails, from the 1933 Glass-Steagall Act to modern Basel III regulations.
- The 'factory model' of private markets, characterized by rapid fundraising, narrow strategies, and relaxed underwriting standards, has increased risks and asset-liability mismatches, which could lead to future crises if not addressed.
- Private market shifts, including the growth of SMAs and private credit, have introduced new risks, but responsible management and market discipline can mitigate systemic threats.
- Technological innovation like AI offers significant opportunities for productivity and market evolution but demands that firms and individuals adapt quickly and responsibly.
- Fundamentally, investment success depends on clear purpose, disciplined risk management, and aligning incentives with long-term value creation, especially in turbulent times.
Summary
The Evolution of the U.S. Financial System and Its Guardrails
This section traces the development of the U.S. financial landscape from the pre-1933 era to the present. It explains how the massive failures during the 1929 crash prompted significant regulations like the Glass-Steagall Act, which separated commercial and investment banks. Post-World War II stability was achieved through these guardrails, although they limited growth. The deregulation movement that culminated in the 1999 repeal of Glass-Steagall led to a wave of consolidations and increased leverage, ultimately contributing to the Global Financial Crisis of 2008. The discussion emphasizes that the core issues often stem from mismatched assets and liabilities and a lack of proper guardrails, with systemic risks emerging when these are ignored.
The Rise of the Factory Model & Its Significance
This part discusses the shift towards a ‘factory model’ within private markets, characterized by the industrialization of fundraising and investing. Signal changes started around 2018, with firms attempting to raise large sums rapidly via narrow strategies, and deploying capital under relaxed underwriting standards to match the increased inflow. This model promotes the quick deployment of capital at the expense of traditional prudence, driven by incentives that value size and fee generation over long-term investment returns. The factory model's acceleration, especially post-COVID, has led to significant asset-liability mismatches, increased leverage, and a focus on deploying as much capital as possible, risking future instability.
Private Markets, Wealth Channel, and Systemic Risks
This section describes how new channels like SMAs and private credit funds have flooded capital into private markets, often with narrow strategies and aggressive fundraising tactics. These shifts have created asset-liability mismatches, especially as investors expect liquidity and the ability to redeem quickly, which conflicts with the illiquid nature of private assets. Though currently not systemic, these changes pose heightening risks if unchecked, particularly because of the incentive structures and behavior shifts stemming from the factory model. The discussion emphasizes the need for responsible behavior, proper governance, and wide aperture strategies to avoid future crises.
The Impact of Creative Destruction & Technology on Investment Opportunities
Alan Waxman highlights how technological innovation, especially AI, is a key driver of creative destruction that reshapes industries and markets. While AI offers tremendous productivity gains, it also introduces challenges and risks, particularly for firms that are slow to adapt. Waxman discusses his approach to team development, emphasizing continuous learning, adaptability, and structured personal systems for managing priorities. The broader theme underscores that technological disruptions are opportunities for growth and innovation, but also require facing difficulties head-on with resilience and strategic clarity.
Guidelines and Principles for Investment Firms Amid Changing Dynamics
The episode concludes with Waxman offering principles for investment firms to succeed in a rapidly evolving environment. Key advice includes maintaining matched assets and liabilities, rigorous underwriting standards, and clarity of purpose. He stresses the importance of responsible behavior, long-term thinking, and aligning incentives with the core mission of serving clients’ best interests. Waxman advocates for market mechanisms that punish irresponsible behavior, emphasizing that a disciplined, principle-driven approach will foster sustainable success over short-term gains.
Sponsors
- Ramp · Ramp’s mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to ramp.com/invest to sign up for free and get a $250 welcome bonus.
- Vanta · Trusted by thousands of businesses, Vanta continuously monitors your security posture and streamlines audits so you can win enterprise deals and build customer trust without the traditional overhead. Visit vanta.com/invest.
- WorkOS · WorkOS is a developer platform that enables SaaS companies to quickly add enterprise features to their applications. Visit WorkOS.com to transform your application into an enterprise-ready solution in minutes, not months.
- Rogo · Rogo is the AI platform for finance, building agents for Wall Street trained to understand how bankers and investors do work— from diligence and modeling to turning analysis into deliverables. To learn more, visit rogo.ai/invest.
- Ridgeline · Ridgeline has built a real-time, modern operating system for investment managers, handling trading, portfolio management, compliance, and reporting through an all-in-one cloud platform. Visit ridgelineapps.com.
Show notes
My guest today is Alan Waxman, co-founder and CEO of Sixth Street, a $130B global investment firm.
Private credit is one of the most discussed topics in markets right now, and there is a lot to make sense of. The current discourse is almost entirely focused on symptoms. Alan Waxman has spent the time diagnosing the root cause.
Alan thinks about the financial system the way a historian would, studying the incentives, guardrails, and market structure that determine how things play out.
In this conversation, he traces the evolution of American finance from the 1929 crash through Glass-Steagall, the GFC, and Basel III to explain how we arrived at what he calls the factory model, the industrialization of liability-gathering and asset deployment that he believes is the root cause of everything happening in private markets today.
This is my second conversation with Alan, our first one is one of my favorites from last year.
For the full show notes, transcript, and links to mentioned content, check out the episode page here.
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This episode is brought to you by Ramp. Ramp’s mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to ramp.com/invest to sign up for free and get a $250 welcome bonus.
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This episode is brought to you by Vanta. Trusted by thousands of businesses, Vanta continuously monitors your security posture and streamlines audits so you can win enterprise deals and build customer trust without the traditional overhead. Visit vanta.com/invest.
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This episode is brought to you by WorkOS. WorkOS is a developer platform that enables SaaS companies to quickly add enterprise features to their applications. Visit WorkOS.com to transform your application into an enterprise-ready solution in minutes, not months.
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Rogo is the AI platform for finance. They're building agents for Wall Street that are trained to understand how bankers and investors actually do work: from diligence and modeling, to turning analysis into deliverables. To learn more, visit rogo.ai/invest.
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This episode is brought to you by Ridgeline. Ridgeline has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. Visit ridgelineapps.com.
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Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com).
Timestamps
(00:00:00) Welcome to Invest Like The Best
(00:02:43) Intro: Alan Waxman
(00:04:35) Financial System Guardrails & Incentives
(00:05:56) System 1: Pre-1933 to 1999
(00:07:39) Glass-Steagall Legislation
(00:10:46) Deregulation & Rise of System 2
(00:12:27) Leverage, GFC, and System 2's Collapse
(00:14:25) Basel III, Dodd-Frank, and System 3
(00:15:32) Why System 3 Could Be the Best Ever
(00:19:04) Behavioral Shifts Starting in 2018
(00:19:52) The Factory Model
(00:24:33) Acceleration of Factory Model
(00:28:25) FRE Multiples and GP Incentives
(00:34:59) Wealth Channel & Asset-Liability Mismatches
(00:36:15) Why This Won’t be the Next GFC
(00:45:31) AI, Creative Destruction & Opportunity
(00:49:35) Alan’s One-Sheet Brain System
(00:55:01) Lessons by Decade: Hui
(00:59:28) Face the Tiger
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