Alan Waxman, Sixth Street Co-Founder and CEO, on Bloomberg TV

Dani Burger: In terms of the world of private capital, and really markets as a whole, are riding this really large AI wave. A lot of it has taken the form of things like infrastructure, data centers, chip financing. Those are areas that Sixth Street has specifically sat out. Why?

Alan Waxman: Demand is real. The build is real. The transformation is real. But when you step back, we're having the largest CapEx boom ever, and no one truly understands the unit economics because they keep evolving through the system. It's hard for us to think about, at least on the credit side. On the equity side, it's a little bit different. I think there are three things on our mind that we're observing that concern us. The first is that there's been a massive expansion of credit quickly. The second thing is speculative fervor, or animal spirits, or FOMO. And the third thing is that we're starting to observe distortions in the market. Why do those three things matter? Because in our investing career, every time we see those three things being true, it results in a dislocation. So, let's break those down. Massive expansion of credit: what we're really talking about is data center credit, which is primarily construction financing, and chip financing. On the construction financing side, you're already seeing a number of banks looking to sell this. There's indigestion. Some of them are concerned that they didn't understand the documents as well as maybe they should have. Again, early signs, but that's number one. Number two is speculative fervor. I live in Silicon Valley. You talk to anyone. I'm in the heart of all this. The amount of FOMO and speculation: you talk to any venture, any Series A, any growth investor, the ecosystem is just full of speculative behaviors. Again, that doesn't mean they're not going to be good investments, because they could be from an equity perspective. But from a credit perspective, you have capped upside. So, it's a little bit different. On the distortions, and this is the third piece, what we've been observing are a few things that concern us. The first, which everyone knows about, is power. And this is before the midterms. There's just a math problem. There's not enough power to be procured. The power that is going to be procured is getting more expensive and it's taking longer. And again, that results in distortions that reverberate through the market. A couple of other ones. Everyone talks about insurance capital as the holy grail to finance this. And that's true. It has been the major provider of capital, particularly on the chip financing side. You look back and say, hey, AA credit, Google, Microsoft, Meta, good risk. But there's this thing we learned a long time ago called single-name concentration. Let's say you've got a certain amount of exposure to Microsoft, great credit, or Nvidia, great credit. But, once you reach your single-name exposure, all these insurance companies, they’re risk managers. Because they make a very small margin on what they invest in, so they can't have losses. So, once you get to your single-name exposure, it doesn't matter what the price is or the terms. There's no más. What we've heard from our clients, and we have a number of insurance investors, is that they're either full, almost full, or they're going to be full very soon. Why does that matter? Because that tier of capital is the cheapest form of capital out there. If that capital gets full, then you're going to the next tier of capital, which is pension funds and sovereign wealth funds. That's really 8 to 9% versus 5% to 6.5%. And that is a material difference when you're talking about 70% of the debt stack. The last thing I'd say, and I think this doesn't get covered enough, is that one of the things you're always looking for in distortions is when inventory starts building up in the system. Right now, at least our numbers, there's about $200 billion of chips sitting in warehouses because the data centers aren't ready. When you have that dynamic, again, if you've got an asset that depreciates over 20 years, it's all good. But we have an asset that maybe depreciates over two years, maybe three years, maybe five years, that just creates distortions. Again, when those three things are true, if you go through patterns of history, it generally means you're headed to a dislocation. That doesn't mean it's going to be a big dislocation.

Dani Burger: What would that dislocation look like? Who's left holding the bag, for example?

Alan Waxman: These things inflate up together and then they inflate out together. Maybe it hits equity valuations, which means maybe the AA credit parties are unwilling to provide as much credit as they have. Maybe it reverberates. Another thing I should have mentioned is mismatched assets and liabilities. Take the neoclouds. They've contracted with data centers here, and they've contracted separately for chips. If the chips show up and the data center's not ready, you have an asset-liability mismatch. It's hard to predict how these things are going to play out, but the severity, how big the dislocation is, is determined from connectivity, or some people say circularity, leverage and mismatched assets and liabilities. Depending on how extreme that is, that will determine the severity. But again, the demand is real. This is going to happen. You just have to go through a couple of dislocations. It’s just a question of all these assets will ultimately be productive assets, like the whole infrastructure build. But who's going to own them? I think that's undecided. And the other thing that's undecided is, when things shake out and stabilize, what are the unit economics going to be throughout the system?

Dani Burger: But this is the thing, Alan. The people investing in this, the big funds, the big publicly listed ones, you'd think they would understand the unit economics. These are very intelligent people. Are there other drivers that are driving them to do this, perhaps having them overlook some of the risks? For example, I know you've talked about your concern about the factory model, the asset-gathering nature of private capital right now. Is that pushing funds to invest more heavily in these riskier aspects?

Alan Waxman: Look, there are a lot of smart people out there. We're not in people's investment committees to know. But at the early part of this, when you're looking to double a risk and you haven't reached your single name concentration, that's pretty good risk. From our viewpoint, we didn't think it was good risk-reward, because you're hardly getting paid for what we think is a lot of correlated risk. But that's just our opinion. Because of our model at Sixth Street, we have the flexibility to ask: where is it more attractive? In the credit? In the structured equity? Is it more attractive in the equity? We can look across, because we have a flexible mandate. So, we can look at where the best relative risk-reward is, not only within the capital structure but across the whole ecosystem. And you can see the things we've done. You saw Databricks. Given the stuff we’ve done in the application layer, we ultimately think when everything's said and done, the unit economics are going to accrue to the application layer. But again, all of this is evolving around it, and until we get to the end state, you're going to have to go through a couple of dislocations. Hopefully they're not severe. That's our hope.

Dani Burger: Does it burn some of your peers along the way? I'm trying to figure out just how painful that dislocation looks.

Alan Waxman: Again, every one of these structures, on the data center financings and the chip financings, they’re all different. There's this thing called basis risk. Everyone's looking at the AA credit. That's what they're relying on to get comfortable. Now, if it's a hell-or-high-water contract, then you feel pretty good about getting there. But in a lot of these contracts, there’s just things that create basis risk and other types of risk before you can get to that AA credit. So, I think that's the watch-out. How it all plays out, we'll see. It may all work out. It may be great. But in our experience, when those three things are true, it's generally going to be a dislocation. It doesn't have to be a severe dislocation, because the demand is absolutely real.

Dani Burger: One of the remarkable things is that even though you're not playing in this pool directly, you're playing in adjacencies. We were just having a conversation that this is one of the busiest time periods for you, even though you’re not in there right now. What has kept Sixth Street so busy right now? What is the opportunity set in front of you?

Alan Waxman: I’d say a couple of things are happening. First of all, you have stuck private assets. This is across corporate private equity, real estate private equity and infrastructure private equity. These are funds that have expired past their expiration date, and by our numbers that's about $4 trillion. Those funds need solutions. There are lots of different ways to play it. We can provide many solutions in many different ways, depending on what makes sense that’s a win-win for them. That's one of the things happening. The second thing is that at the same time, you have growth and dislocation in the technology space. In the Growth space, and talked about the application layer: some incredibly good growth capital opportunities. But at the same time, you've got this thing called the SaaSpocalypse, where there's real dislocation. It doesn't mean all those companies are going to disappear like people say. But it creates opportunity for capital, and that's where you play. So you have those two things happening, and obviously AI infrastructure. We're looking at it, and at some point, we'll probably be more active than we have been. Those three things alone are a massive reservoir of opportunities that have kept us busy. But the key in these environments, in any environment, is that you need to have windows across a bunch of different ecosystems to figure out where the value is and where the value's going to be, and to compare those on a dynamic basis, because it's evolving so quickly. You have so many things happening in the world on a top-down basis and so many things happening on a bottom-up basis. This is even before the midterm outcomes. That's why I think flexibility is absolutely critical in these environments.

Dani Burger: I'm going to follow you there. How much did the midterms change things? For data centers, maybe it's a little more obvious in terms of permitting. What about the private capital world? If you have regulators that take a closer look at things, are you expecting that?

Alan Waxman: It's hard to know. You would think that with any change in administration, there's probably going to be more scrutiny on aspects of private capital. But again, it's hard to predict because it's so new. I think things are going to change, not only for the private capital industry but for many other industries. There's probably going to be a different flavor of let’s say scrutiny. And you'll figure out who's been doing things the right way and who has not. We'll see what happens.

Dani Burger: So maybe healthy change, then?

Alan Waxman: It depends.

Dani Burger: You're not ready to make that leap yet.

Alan Waxman: We'll have to see what it is. We will react to it. But our north star is the same: continue delivering great outcomes for our investors and do things the right way. And for us at Sixth Street, it's One Team, one dream and working together, so we can look across all these different ecosystems at where the opportunities are going to be. And like we just discussed, there's a lot going on right now.

Dani Burger: Let's talk about what's going on in the world of SME, sports, media and entertainment, because Sixth Street is very present in this. You have investments throughout some of the top leagues, and in some of the up-and-comers like flag football. There are stories of assets coming up and a billionaire or a private equity fund getting involved, and we're looking at things like record valuations. What is driving that right now? What's changed that's really put this into high gear?

Alan Waxman: I'd say two things. First and foremost, you have to separate the world between challenger sports properties and established sports properties. The NFL, MLB, NBA, all the big leagues, NWSL, NHL, they’re very different. The risk profiles are very different. Ultimately, it's about supply and demand. It's very simple. If you think about the top of the K, there's a robust number of people at the top of the K, and there's a finite number of sports properties. As those come up, they don't come up that often, so as they come up, there's going to be a lot of support for any valuation. Some of it's divorced from economics. Some of it's not. It depends on the team and the league. As long as the K is intact, and obviously a lot of that will be tied to the stock market and AI, that's going to stay intact for those upper-tier leagues. The challenger properties are more venture risk or growth equity risk. Some of them will break through. Some of them won't. It's a very different sort of risk-reward. But in general, there are a lot of things to like about sports. The other thing is infrastructure. Changing infrastructure in stadiums and practice facilities, all that changes the economic equation. And I've heard it said that sports is the anti-AI, AI-protected.

Dani Burger: It's been said a lot.

Alan Waxman: Yes, and that's true in sports, I think. But ultimately, things come down to economics and supply and demand, and I think that's intact. But you have to watch the top part of the K and see how things evolve.

Dani Burger: Just finally, can we marry these two things? If you are worried that there are dislocations in AI, and if so much of sports is being fueled by wealth coming from AI and the equity market, does that mean valuations for sports are necessarily looking toppy?

Alan Waxman: It depends on the severity of the dislocation. If it's a minor severity, then things continue up, because there's real demand. It’s real. The application layer, all these things are going to make sense. I live in Silicon Valley. There are so many companies people haven't heard of that are going to be great companies.