Executive Summary
Sixth Street CEO Alan Waxman identifies the root cause behind private credit market stress: the 'factory model' that prioritizes capital raising over investment discipline. Starting in 2018, private capital firms began industrializing liability gathering, raising unlimited capital from wealth channels through perpetual private BDCs that promise quarterly liquidity on illiquid assets. This structural mismatch accelerated post-COVID as firms chased Fee Related Earnings multiples that expanded from 10-15x to 25-30x+. The current redemption crisis in perpetual private BDCs represents a recalibration moment, not systemic risk, occurring during economic strength rather than distress. Waxman argues System 3 (post-Basel III) could be optimal if commercial banks remain conservative while private capital provides risk capital with properly matched assets and liabilities. The factory model's narrow strategies and inflow investing requirements have compromised underwriting standards, creating terms that sacrifice return per unit of risk for deployment speed. This represents a fundamental departure from artisanal investment management toward industrialized capital deployment driven by GP equity value rather than investment performance.
Key Insights
what Alan Waxman said“The factory model in our industry is there's two parts to it, and then there's an output. First part is the industrialization of the fundraising process, say liability gathering, literally raising as much capital as you possibly can, as fast as you can.”
what Alan Waxman said“You're taking an illiquid asset and you're giving investors an ability to get their money back quarterly. They say semi-liquid, there's no semi-liquid. There's no such thing as semi-liquid.”
what Alan Waxman said“I don't think this is a systemic issue yet for two reasons. One, we're only five years into this so it's early. And the second thing, at least for now, there's a pretty strong economic backdrop.”
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