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

What It Covers

Alan Waxman of Sixth Street traces the U.S. financial system through three regulatory eras—Glass-Steagall (1933), its 1999 repeal, and post-2008 Basel III reforms—to explain how private credit grew from $500B to $2T, why the "factory model" of capital raising now dominates, and what asset-liability mismatches mean for markets today.

Key Questions Answered

• •Three-System Framework: U.S. financial history divides into three systems: System 1 (1933–1999) separated commercial and investment banks under Glass-Steagall, creating stability but limiting growth. System 2 (1999–2008) deregulated and merged them, enabling leverage of 20–30x that contributed to the GFC. System 3 (post-2010) uses Basel III capital and liquidity restrictions on commercial banks while private capital fills the risk-taking gap—a structure Waxman considers potentially the strongest in U.S. history.
• •Factory Model Diagnosis: The factory model begins on the liability side—raising capital as fast and broadly as possible—then forces industrialized deployment on the asset side. Firms that adopt it raise narrow strategies (e.g., direct lending only), lower underwriting standards to increase deal hit rates from 0.5% to 2–3%, and accept asset-liability mismatches. FRE multiples rising from 10–15x in the early 2010s to 25–30x+ today created the financial incentive driving this behavioral shift across the industry.
• •Asset-Liability Mismatch as Root Cause: Every major financial crisis involves leverage, liquidity mismatches, or both. Perpetual private BDCs raised through the wealth channel invest in illiquid assets while offering quarterly redemption windows—there is no such thing as "semi-liquid." When redemption requests exceed the standard 5% cap, as is happening now, it signals structural misalignment. Waxman frames current market stress as a recalibration opportunity, not yet a systemic crisis, because the economic backdrop remains relatively stable.
• •Wealth Channel Risk Profile: Retail and high-net-worth capital is procyclical—easiest to raise in good environments and fastest to redeem in volatile ones. Wealth channel allocations to private markets sit around 2% today and are projected to reach 10%+ over the next decade. Responsible access requires wide investment mandates across multiple asset classes, strict inflow governance (including waitlists), and investor suitability standards that assume a 2008-style crisis scenario before committing capital.
• •Clarity of Purpose as Competitive Moat: Sixth Street has zero perpetual private BDC exposure despite having the track record to raise them. Waxman attributes this to maintaining a consistent clarity of purpose—generating strong investor returns rather than maximizing AUM. Firms that survive long-term share one trait: they never lose sight of serving their customers. The factory model's FOMO is countered by returning to first principles on what the firm exists to do, then holding that line through every fundraising cycle.
• •Personal Organization System: Waxman uses a two-page handwritten system called "the brain" to manage time and priorities. Page one (left brain) contains five strategic priorities derived from an annual personal business plan, a people-to-call list, high-priority tactical items, and health goals. Page two (right brain) captures creative ideas and investment themes tracked over 25 years. Rewriting the sheet weekly—typically on Sundays—consistently surfaces two to three new connections or ideas and embeds priorities through the physical act of writing.