Alan We're looking at a challenging time in the economy.
You have most investors are still betting on rate cuts this year, a number
of them, and they're still confused about how soon those rate cuts will come
to fruition and how deep they will go. Do you think that they're right to
expect so many? I think the everything about investing
is about probabilities. And I think the highest probability is
that's going to be the case because inflation is coming down.
Having said that, I think that there's a bit of an underestimation for how easy
financial conditions have come over the last couple of months.
You know, you look at what's happened in the equity markets.
You look at how credit is tightening in the way it is.
And that's like the Fed's worst nightmare.
So it's very difficult to arrest inflation when the consumer is as strong
as it is. So I think that's the one.
Watch out. But again, probabilistically I think
it's right for people to assume that. But I think people might be misjudging
the probability that financial conditions have come to gotten too easy.
How do you prepare for that probability? What it assumes is that interest rates
could stay higher for longer, inflation could stay higher for longer.
What does that mean in terms of how you invest?
Well, a big part of the economy across a number of different asset classes,
whether it's real estate or whether it's private equity, built a lot of their
capital structures on a on a very low rate environment, some might say free
money. So I think the challenge with staying
higher for longer is that a lot of these capital structures that have been built
in a way that for free money air that that that that they need to be re
equities or more capital needs to come in which which creates an opportunity
for security to going to be a solution provider to be able to provide capital
so that they can grow in their capital structures.
But again, so much of the economy has been built for low rate environments.
I think that's a challenge that that it might pose for the economy.
Well, do you have to prepare for the prospect of not just higher for longer
rates, but even a rate hike at this point?
It's interesting you say that because it's something we in our in our
investment committee we've been talking about a lot.
When you think about the consumer, which has been the Super Bowl champion of the
economy, people said, you know, everyone last year was predicting a hard landing.
Hard landing. What really got us to this, the
consumer. Consumer has a job.
Wages are growing. And most importantly, their biggest
liability is typically their mortgage. That's been fixed with wages growing and
inflation coming down. It's creating a lot of real spending
power. So that probability of, you know,
potentially not even rate cuts, but a rate increase is, I think, a lot higher
than people expect. For those reasons, it's interesting you
go back to around this time last year, a little less than a year ago, and under
the weight of higher interest rates, you saw some significant things start to
break, particularly cracks in the the banking system.
If you saw rate hikes or even rates stay at the level that they are, what else
breaks? Look, anything that is a levered asset
class that has floating rate liabilities is at risk and that applies across big
parts of the economy. Again, is it going to break?
It may not necessarily break because it depends on how high rates get increase.
And again, that's not our predominant probability, but it will create
additional stresses in the system. And that's something we're always
watching out for as things start to weaken in some parts of the market.
You think about the regional banking system and how much private credit
players have been able to step into that fray.
What is the opportunity for you now to buy assets at prices that may have
started to fall off in value? The way we look at the opportunities,
not only by an asset, but really what we're trying to be is provide new
capital or new equity or more just general capital in the situations,
whether it's companies or real estate assets.
So that's kind of the way that we think about it.
I think we're far off from banks, you know, fire selling assets.
That's not our predominant probability because, again, the economy's pretty
strong right now and arguably maybe maybe getting too strong.
So that's not our predominant probability.
But obviously, when you look at what's going on in commercial real estate,
again, we don't think this is systemic risk, but there are obviously large
exposures, particularly in some of the smaller and regional sized banks banks,
and that's something we're looking out for.
How much pain is there in that system? It's meaningful.
You know, when you look at the tangible equity in a lot of these regional banks
and then you sort of transpose it against the unrealized losses, it will
create stresses. You know, obviously it's banked by bank
dependent. But again, the economy's really strong
right now. So I think that's providing some
protection for that. But if rates stay higher, that will have
us to create additional stresses. Well, you mentioned the commercial real
estate market and the real estate market more broadly.
If you were to put money to work in that sector at scale, what could that look
like for you? It's interesting you say that because
the last year or so we have a big real estate team.
The last few years we haven't really done that much because we thought
valuations got way too speculative and. What's interesting right now is the fact
one of the things that we think is one of the bigger opportunities for six
years because we're sitting with a pretty clean portfolio, there's lots of
opportunities. And that's really across the whole
commercial real estate spectrum, not only in the US but also in Europe.
Are there parts that you avoid? You think about just how damaged the
office sector has become and worries about work from home and the impact that
that might have on big cities. Are there parts of the area that you
avoid in general?
There's obviously different markets that pose different risks, but as long as
something is not binary risk, we can generally price it.
That's what we do. That's our job as investors, whether
it's in real estate, whether it's in corporates, whether it's in
infrastructure, whether it's in agriculture.
That's our job. So again, it's longer, as long as it's
not like stroke of the pen risks, we can generally price that risk.
So we're looking across the whole swath of commercial real estate.
So is that an easy way to say you can get into office, but for the borrower it
could be expensive in a new in a new money situation.
If you look at sort of the cost of capital today versus what it was, let's
say, pre-COVID or even in most parts of COVID, it's obviously different costs of
capital. But over time that will start to work
itself, work itself out, and things will normalize once once the economy gets to
a steady state. Now, let's take this massive step back
for a second, because you think about the wake of 2008 and just how much the
large banks have retrenched. Regional banks really started to feel
the pain of what had happened at that time and the boom you saw in private
investment giants. And then you look at kind of this second
phase here where there's a chance once again for you and your rivals to get
much bigger. There are a lot of questions about the
loans that are extended from regional banks and the place that private credit
could play in that space. Do you see this as kind of a second
coming, the ability for you guys to get much bigger in the wake of so many firms
kind of contracting on their lending practices?
Yeah. So there's a couple of things happening.
One is, you know, stress or damage balance sheet set, obviously contracts
lending. And a big part of that you're seeing in
smaller regional sites, banks as a result of their commercial real estate
exposure. That obviously creates an opportunity
for private capital players like ourself to come in.
But the bigger thing is really, if you go back to what happened in 2008 and
obviously you start thinking about Dodd-Frank, is that when you go back
through history, it's never a credit thing that creates crisis, is it's
always a liquidity issue in the heart of every liquidity issues, mismatch of
assets and liabilities. So I think as a principal and this is
we're talking about systemic risk here. One of the benefits of private capital
is that we have matched assets and liabilities.
When you think about a bank where you've got short term deposits, it's very
difficult unless you're one of the larger banks that's got a highly
diversified base, it's very difficult to sort of match assets and liabilities.
And that's why private capital is sort of a natural extension into these
spaces. And by the way, good for the economy
because it fills in the gaps. If you go back to the RSVP time period
where banks stop lending, private private capital is able to step in there
and, by the way, increase the probability of a soft landing.
And I think sometimes that gets lost in the in sort of the discussion, but
that's really the heart of it. It's an interesting moment because over
the last year, you saw private credit get into some massive deals.
You guys were just founded in 2009, and yet you've become one of the most active
players in the space. You were on some of the largest
transactions as a lender that the market even saw.
But now we fast forward to this year and the banks are coming back.
The markets are opening back up. How do you see the competition between
the regular way banking system, the syndicated loan market and private
credit playing out there? There's always there's always been
competition. Everything that we do, this is not 30
years ago. There's always competition.
So for us, like when we think about banks, we think about it more as
partners. They they lend to us.
They advise us. In a lot of cases, they co-invest with
us. So there's a there's a there's a
combination of competition, but there's also a lot of partnership.
And that's generally how, you know, 60 as we're approaching sort of those
relationships. That's kind of how we how we think about
it. Oh, I'm glad you mentioned that, too,
because I think that's been an open question in the market how willing firms
like you would be to partner with a bank.
A lot of the banks are going off and starting their own arm.
Is Goldman Sachs. Your alma mater is doubling down on
direct lending while also syndicating loans on the other side.
Jp morgan has their own private credit venture at way here.
Do you see yourself partnering with a bank?
We partner with banks all the time. Would we do something in that type of
structure? I wouldn't rule it off the table.
Is that one of our top ten priorities? Not one of our top ten priorities.
But if there's a win win between one of our bank partners, we're always going to
be open minded to that. I mean, that's six ST.
Our firm was built on win win partnerships, so we'll always be open to
it and, you know, happy to discuss with it if they've got a good idea.
Well, bring us inside the thinking. What are the reasons for it and what are
the reasons against it? Should you make some of those more
formal partnerships work out? Why would you do it?
It's hard. It's really hard to think about because
it's just not. We have a we have a lot going on.
68 were as busy literally as we've ever been in our history.
I mean, every one of our businesses is busy.
So given it's not a top priority for six years, it's not something we spend a lot
of time thinking about it. Well, well, it's interesting, too.
It's not just partnerships, but your ability to buy assets from other banks.
Back in October, you led a consortium here to buy Green Sky, this consumer
lending business that Goldman had bought and then exited.
Why? Why did you agree to do that?
Again, it goes back to sort of what we talked about earlier, which is when you
look at the components of the consumer, consumer, their biggest liability is a
fixed rate mortgage. Wage growth has been pretty pretty
constant. Everyone's got everyone's you know,
everyone's got a job. It created pretty good conditions.
So that's number one. But the second thing is it's just an
incredible franchise. It's one of the best franchises out
there. We followed the we followed the business
for a long time, and marrying those two theses together made it an interesting,
interesting transaction. So this is a big bet on the consumer.
It's it's a big I wouldn't say it's a big bet on the consumer.
I'd say it is absolutely a component of the bet, but it's also just a really
good a really good franchise with a really good management team.
And those three those three things together beat it.
Really interesting for us as you navigate kind of the area of the
consumer that you've said a few times now, it's been so strong.
What worries you about the US consumer? You think about the leverage that they
hold today in credit card debt alone. You think about any worries about a
softening job market. Are there concerns that you have?
The biggest concern is if you start to see big layoffs.
And what could create big layoffs is people start feeling less good about the
economy. What is the reason why people can feel
less good about the economy? It's all sudden they have a mindset in
boardrooms that, you know, financial conditions are easing.
It goes back to what I said earlier, which is that they start to if financial
conditions easing, the kind of gets too strong and the Fed can't cut rates, in
fact, possibly has to raise rates, that could have a big impact.
Now, I will say the Fed has done a very good job.
They've been very smart with respect to their management of the ten year
treasury. Like, if you look at their balance
sheet, they've been managing down on the risk.
They've kept the short of the curve high.
But ten years, which finances a lot of the investment grade companies, which a
big part of the job universe, by the way, have all fixed rate debt,
those holdings have actually gone up. So in the face of Fed shrinking balance
sheet, that is the one part of the market where they've actually kept the
balance, in fact, actually growing the balance sheet.
And that's, I think, something people sometimes don't pay attention to.
So that that's the biggest just giving back to it is job losses.
That's always the big concern. Do you worry about a market that's still
on life support? If we still have quantitative tightening
kind of propping up parts of the market like the ten year end of the curve, have
you? Well, I think it's all it's all about
managing a series of risk. And I think the Fed, at least so far,
may be early. You could argue they're a little slow to
get in the game, but I think so far they've been really thoughtful and
ultimately their job, it's a very difficult job.
There means in a series of risk. Can you weigh that versus the other
risk? I think from a risk reward perspective,
I think they've done a pretty good job. Now,
consumer more in the consumer. You've made a very notable bet on sports
here. You have exposure to all sorts of
different franchises, from women's leagues to soccer to the NBA.
What is there a part of that you're not a part of yet?
When you think about sports and events, is there a league that you'd wish you're
a part of? I think that we're very bullish on
women's sports. We started in women's soccer, some might
say women's football. I think women's sports, when you look at
technology, it's broken down the barriers for people to access women's
sports. You get all the trends on attendance, on
sponsorship revenues. It's just the very beginning.
And it's not just soccer, which is, we think the most obvious one today.
It's really across every sport and you're seeing it across volleyball,
you're seeing across basketball. I just saw something recently about
cricket. It's just the beginning.
And we're at the very we're at the very beginning of that.
And anything related to that theme is something we're very focused on.
It begs the question to as investors like you go into different areas,
different things, sports being one large one that has been noticeable, are there
things investors are ignoring? You think about private credit and you
think about the big mega-deal, the financing of mergers and acquisitions.
Are there areas that are more exciting to you in sports in general?
Look, I think three sports life experiences very and we've talked about
that. It's not only women's sports, it's also
life experiences. The other thing is real estate we spoke
about. But part of being interesting is a clean
portfolio because we didn't do a lot of the sands.
I think some people have. Over the last three years.
It positions us in a pretty unique way. That's a big opportunity, not only in
the US and Europe. And then lastly, just going back to what
we've been talking about today is just when you think about a big part of the
economy. Companies were financed in a free money
or low rate environment. And those capital structures were not
built for higher rates. And again, they they they possibly
that's predominant case. They'll come down.
That just creates not a lot of opportunities to be partners with
companies and be able to provide re-equip, re acquisition or additional
capital into businesses and assets. So this is not just the regular way M&A.
This is leveraged finance as it pertains to would you would you be refinancing
some of the riskier companies? It's everything.
So our investment philosophy is
flexibility. You know, the way the way our firm was
built from literally day one is no silos, no politics, no B.S.
And the reason why we have that is so that people can work together.
Like when we set out Sixth Street, we said we don't want to be private equity
or private real estate or private credit or infrastructure, real estate.
We just want to be investors. But you can't just be investors that
people are talking together and that's how we're set up.
So like when we think about the the whole universe of things, we go in no
company. We want to we don't go in there with.
It's a refinancing that's buying assets. We go in there, what are you trying to
solve? And then based on what they say, we
customize a bespoke solution for that. And that's really the heart of our firm.
That's like flexibility at scale is really how we built Sixth Street.
So we're not going in there with a hammer.
We go in there with 20 different tools. They tell us what they're trying to
solve, and then we try to solve it with them through a series of typically
whiteboard exercises, iterating on what's the best solution for them.
It's funny, it seems like everyone in the market is doing something opposite
from what you did. It's you had a relationship back in the
day with TPG, right? You had a relationship with another firm
and now you're watching all these other firms tie up and consolidate.
I'm very curious about what you think about all this industry consolidation.
And if you see it again for your future, I think it's going to continue because
the natural maturation, you're going to continue to see that that's not what
Sixth Street's thinking about. You know, we set up before we're a
little bit unique in that we set up our firm day one to be a multi-strategy firm
in a private capital basis. A lot of the larger firms, they start
off as private equity and they've reverse engineered into other
businesses. From day one.
We had a plan because that's the business that that I ran and some of my
other partners at Goldman and most recently our newest partner joined
Salisbury, ran a Goldman. So we've always been thinking about it
this way. So is that that's not what we're
thinking about. We're thinking about building a long
lasting firm to serve our clients, and that's what we're most focused on.
Is there something, you know, you yourself had come from?
Goldman Julian had also come from Goldman quite recently.
Marty Chavez, former CFO of Goldman. Is there something about Sixth Street
that is kind of like the Goldman of the past pre-IPO?
We don't look at it that way. Like the way we look at it is we had a
vision from the first day we set up Sixth Street, which is, as we've talked
about, no silos, no politics, no B.S., just good human beings trying to do
right by our clients complete flexibility.
We go in there now with a hammer. We try to be completely flexible.
And then lastly, is wrapping technology around every aspect of our business,
from sourcing to asset management, every aspect of our business, which is Marty
Chavez and Adam Cohen coming to the best engineers in the world.
And we think about we're trying to be we're not trying to build anyone else.
We're trying to build Sixth Street. And that vision, you know, it's been
people have been attracted to it. That's why we've had a number of people
join us. But we don't really I don't spin or any
people that know me. I never spent I never read anything that
our competitors do. I don't care what our competitors do.
We like to think independently and we're trying to be sixth straight.
That's all we're thinking about. And that's kind of how we approach the
world.