PE Boom May Disappoint Investors: Josh Easterly

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00:00First of all, we've been managing our BDC since it was formed in 2010,

00:04managed it since 2011, went public in 2014, and have outperformed the market.

00:09What I would say is I think investors are finally waking up that given rates are rolling over

00:14and new spreads are a lot lower than old spreads, that returns are going to be a lot lower in the

00:21future. And as investors, they should only care about the future, not the past. And so I think

00:25that's the issue. We wrote about that in our April letter to our investors. And I think the space,

00:33I think that there should be a signal to the space that they need to think about their cost of equity,

00:36and that should roll through and cure itself at some point.

00:39Right. Again, you've flagged, as you noted in April, that it's an asset class that's bound to

00:44disappoint. What does disappointment actually look like?

00:46I think disappointment, people earn less than they thought. I don't think they lose capital.

00:50I don't think there is an expected, they just have disappoints on expectations. And I think

00:58you keep hearing this argument between banks on private credit and private credit managers.

01:04I think both can be true, which is private credit can disappoint. I think that's what the banks are

01:11saying. And maybe there are managers that will disappoint, given the proliferation of the asset class.

01:17And banks are trying to protect their big profit pool on high yield and leverage loan underwriting.

01:22So I think both those narratives can be true. It's not one or other. And you hear both.

01:27We think the key is having a big platform and being able to move from asset class to asset class,

01:32where we don't have to do direct lending if the risk reward is not right. We control top of the

01:38funnel and continue to move and shuck and jive through asset classes as risk reward changes.

01:43On that point of having to deploy capital, how much more acute are those pressures with the fact

01:50that this is also an industry going through a massive shift and trying to bring in wealth capital?

01:54When that comes in in specific funds that needs to be deployed, how much more greater do the

02:00pressures get to deploy and maybe at the sake of returns?

02:03Yeah, I think you have two choices as an investor, what to invest in and when to invest.

02:07And I think as if you manage retail capital with a narrow investment mandate and large scale

02:15of it, you lose both those choices. You have dollars coming in and you have to invest it.

02:21So you lose the win and the what's what's on the menu that day.

02:25It's not like you can wish for something different than what's on your pipeline.

02:28I think the design that will be a winning design, which in our mind will be having, if you're

02:36managing that type of capital, having a broad base of opportunity sets in a multi-strat platform

02:41so you can choose relative value. I think that's the winning formula, but time will tell.

02:47So in that formula, and again, I assume that this is the formula that you're pursuing at Sixth

02:52Street, you can avoid those pressures. For those that can't avoid those pressures,

02:56does this industry lose a lot of its alpha? Does alpha turn into beta when you're just

03:01investing in whatever you can?

03:03Yeah, look, we've been managing that strategy for institutional investors in a fund called

03:07TAU, which is about $30 billion for, I don't know, almost a decade. And so that formula works

03:14really well for institutional investors. You know, could it possibly translate to other

03:19investor sets? Possibly. I think over time, the challenge with investing is when there's

03:25outsized returns, those returns dissipate, they look more like beta, and you have to keep

03:30moving. And so you have to build a platform that allows you to keep moving. That is culturally

03:36hard, and that takes a large investment to have the teams that are across asset classes and across

03:42strategies. And we think that's a real barrier to entry.

03:45Can we also just talk about the cultural shift of marketing to wealth? Because this is an industry

03:50that's kind of been known to be exclusive, to have institutional clients come to you. How different

03:55is it for that to be flipped on its head?

03:58I got a little slack for a comment I made a couple of weeks ago.

04:01You indeed did. You were talking about sports marketing. Do you want to clarify some of those

04:04comments?

04:05Yeah, I would say it's not marketing or advertising. My point was that is a canary in the coal mine

04:11that the sales channel is changing, and it is a product that is sold and not bought. Our historical

04:19base of investors were institutional investors that had a wrapper around it, that had professional

04:25allocators of capital and consultants, and they actively chose investment strategies and managers.

04:31They didn't choose because they saw a brand on a TV or that it was pushed towards them.

04:35So the canary in the coal mine of that change was that people were advertising. I don't have a view.

04:41I'm not an advertising person. I don't have a view of, you know, one form of advertising is better than

04:45another form. I'm just saying that that is a shift. And ultimately, strategy matters and architecture matters

04:55and culture matters, and investment and experience for the underlying client will win the day.

05:02But I think that is, you know, you're going to need information and you're going to need time and

05:07you're going to need transparency. And that will take time in the space.

05:11So if we are in this scenario where big marketing pushes are happening, the asset class is one that's

05:15being sold and not bought. You and I have talked about this idea of trust, of how important that is to

05:19this industry. If all these things are happening and that's coinciding with a period when returns are

05:25about to not look as rosy, is there an issue of trust, of trust erosion?

05:29I think that is actual the real. Look, financial, I now understand this managing a financial services

05:36firm. It's all about trust. And you have you at the firms that do what they should do versus do

05:42what they can do will ultimately create trust with their clients. And that should be everybody's aim

05:48because you do not want to hurt that investor base in the long term. We're lucky enough. We've been

05:53at this for 16 or 17 years. We got 20 to 30, 40, 50 legacy is really important. And to have a legacy

06:00in this business and given the age of our partners, trust and creating trust really matters.

06:06Before I let you go, I'd be remiss if I didn't ask about some of your sports investments. You have a

06:11wide variety in different types of sports, whether it be more emerging, whether it be some of the big

06:16leagues in the U.S., the sports themselves, some of the event companies around them looking forward

06:22in what's attractive to you now. Is it this widespread or there are certain parts of the sports

06:27industry that you're concentrating on? Yeah. So we think the ecosystem is really interesting.

06:32They're generally great business models that are not they don't they don't lack competition, but the

06:39leagues themselves don't really have direct competition. And we believe that the first ones in will

06:44ultimately win. But we're going to do it in the Sixth Street way. So we bought AV rights on a soccer

06:50league in Europe. We did a stadium financing for Real Madrid. You know, we own a service provider in

06:57the space. We're going to do it in the Sixth Street way. We were early on the San Antonio Spurs.

07:02We think the ecosystem is interesting, but we're going to do in a Sixth Street kind of alpha way.

07:07Do you want to make some news? I know your name's been floated with the with the Patriots in

07:10association with them. I don't know what's out there, so I don't want to comment on that.

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