Alan Waxman - Private Credit and the Modern Financial System - [Invest Like the Best, EP.466]

Episode Summary

Executive Summary: Patrick O’Shaughnessy and Alan Waxman trace how U.S. finance evolved from Glass-Steagall to today’s private capital system, arguing that mismatched assets/liabilities and incentive shifts now shape private credit, wealth-channel vehicles, and systemic risk. The discussion is a history lesson and a warning: guardrails matter, and firms must stay disciplined as AI and creative destruction accelerate change.

Main Topics: Financial system evolution in three eras (Priority: 10/5): Waxman maps finance from Glass-Steagall stability to GFC leverage and today’s private capital regime. Guardrails, leverage, and liquidity mismatch (Priority: 10/5): He argues crises come from leverage plus asset-liability mismatch, not isolated headlines. The factory model of investing (Priority: 9/5): Firms increasingly industrialize fundraising and deployment, shifting focus from returns to capital gathering. Private capital’s rise after post-GFC regulation (Priority: 9/5): Basel III and Dodd-Frank constrained banks, creating a large opening for private capital to supply risk capital. Wealth-channel private credit and perpetual vehicles (Priority: 8/5): Semi-liquid retail products and narrow strategies are a key symptom of the new factory model. AI, creative destruction, and adaptability (Priority: 7/5): Waxman sees AI as a productivity boost and a disruption that will punish slow adopters across industries. Personal operating system and leadership philosophy (Priority: 6/5): He emphasizes clarity of purpose, personal organization, and “facing the tiger” as core habits.

Key Arguments: Glass-Steagall created long stability, but it also reduced growth competitiveness. The GFC was driven mainly by leverage and asset-liability mismatch, not one policy alone. Basel III and Dodd-Frank helped create today’s private capital expansion. Private capital grew by filling the gap left by constrained banks. The factory model starts on the liability side: raise capital fast, then force deployment. Narrow, semi-liquid wealth vehicles can become dangerous when investors demand liquidity. Good investing requires clarity of purpose, matched liabilities, and strict underwriting. AI will create opportunity and risk across all industries, not just software.

Data Points: Banks failed in 1929-1933 era: 9,000 banks failed - Motivating event for Glass-Steagall and FDIC creation System 1 period: 1933 to 1999 - Waxman’s label for the post-Glass-Steagall financial regime Post-WWII stability: 50 years - System 1 was broadly stable aside from the S&L crisis Fixed income market size: from $7 trillion to $14 trillion - 80s to 90s expansion that enabled more leverage Commercial bank leverage pre-GFC: 20, 30 times leverage - Waxman’s description of pre-crisis leverage levels Private capital AUM pre-GFC: about $2 trillion - Size of private capital before Basel III/Dodd-Frank effects Private capital AUM today: around $14, $15 trillion - Growth in private capital in System 3 Private credit AUM pre-GFC: $500 billion - Size of private credit before post-GFC expansion Private credit AUM today: about $2 trillion - Size of private credit in the current period FRE valuation multiple early 2010s: 10 to 15 times FRE - Fee-related earnings valuation multiple before the factory-model shift FRE valuation multiple around 2018: 15 to 20 times - Multiple expanded as industrialization incentives increased FRE valuation multiple before current moment: 25 to 30 times plus - Public market valuation peak for fee-generating firms Wealth allocations historically: 1%, 2% - Typical small allocations to private investments in the wealth channel Perpetual private BDC redemption cap: 5% limit - Redemption pressure exceeded limits in some vehicles Direct lending origin date at Sixth Street: 2001 - Waxman says he started the business with two people Sixth Street perpetual private BDCs: exactly zero - Example of choosing not to adopt the factory model Age 20 to 30: education, learning - Waxman’s career development framework Age 30 to 40: ambition and proof - Phase where he was building Sixth Street Age 40 to 50: go time - Prime productive years according to Waxman

Pivotal Quotes: "What you're reading in the news today are the symptoms, but not really the root cause." — Alan Waxman: Explaining why headlines miss the structural forces behind current market stress "There's no such thing as semi-liquid." — Alan Waxman: Rejecting the idea that illiquid assets can be safely paired with easy redemption rights "Face the tiger." — Alan Waxman: Sixth Street’s ethos for confronting problems and change directly

Implications: The system likely needs a reset in private-market fundraising terms; firms that keep liabilities matched and underwriting tight may gain durability as the cycle turns.