Alan Waxman is the founder and CEO of 6th Street, one of the largest private capital investment firms in the world. Patrick O'Shaughnessy is the CEO of Positive Sum and host of Invest Like the Best.

This conversation explores Waxman's framework of three financial systems spanning from 1933 to today. System One (1933-1999) featured Glass-Steagall separation of commercial and investment banks. System Two (1999-2008) saw deregulation and the rise of leverage leading to the Global Financial Crisis. System Three (2010-present) emerged from Basel III and Dodd-Frank regulations.

The discussion centers on what Waxman calls the 'factory model' - the industrialization of both fundraising and investing that began around 2018. This model prioritizes rapid capital deployment over careful underwriting, creating asset-liability mismatches particularly in the wealth channel through vehicles like perpetual private BDCs.

They examine how AI disruption and market volatility have triggered redemption pressures, revealing the structural problems of mismatched illiquid assets with quarterly liquidity provisions. The conversation concludes with Waxman's personal organization system and philosophy of 'facing the tiger' in times of rapid change.

Three Financial Systems: From Glass-Steagall to Today

System One (1933-1999) began after 9,000 bank failures in 1929, with Glass-Steagall separating commercial banks from investment banks and creating FDIC deposit insurance.

The system provided 50 years of stability post-WWII but wasn't optimized for economic growth due to conservative commercial bank lending and limited fixed income markets.

System Two started in 1999 when Glass-Steagall was repealed due to competitive pressure from European banks that could combine commercial and investment banking.

Deregulation led to massive consolidation, with investment banks leveraging up 20-30x to compete, culminating in the 2008 Global Financial Crisis nine years later.

System Three: Basel III Creates Private Capital Boom

Basel III (2010) imposed capital and liquidity restrictions on commercial banks, forcing them into lower-risk activities while private capital filled the gap for risk-taking.

Private capital grew from $2 trillion pre-GFC to $14-15 trillion today, with private credit expanding from $500 billion to $2 trillion.

System Three worked well until 2018 because it featured matched assets and liabilities - investors couldn't demand money back from illiquid investments.

'This has the potential to be the best system American finance has ever had' - Alan, with commercial banks doing safer activities and private capital providing risk capital.

The Factory Model: Industrializing Investment Management

The factory model has two parts: industrialization of fundraising (raising as much capital as possible) followed by industrialization of investing (rapid deployment).

FRE (fee-related earnings) multiples jumped from 10-15x in early 2010s to 15-20x in 2018, then to 25-30x+ today, incentivizing rapid asset gathering.

'It starts always on the liability side and then it goes to the asset side' - Alan, because without excess capital, there's no pressure to change investment behavior.

Firms began accepting asset-liability mismatches and lowering underwriting standards to facilitate faster deployment and meet inflow investing demands.

Wealth Channel Risks and Perpetual Private BDCs

Starting in 2018, firms moved from institutional SMAs to the wealth channel, which is 'typically the easiest to raise, the simplest to raise, the cheapest' but pro-cyclical.

'There's no semi-liquid. There's liquid and then there's illiquid' - Alan, criticizing vehicles that promise quarterly liquidity on illiquid assets.

Perpetual private BDCs raised in narrow strategies (just direct lending) with unlimited capital and immediate deployment requirements create dangerous mismatches.

AI and software disruption triggered redemption requests exceeding the 5% quarterly limit, creating current market stress but not yet systemic risk.

Building Responsible Investment Firms

'What's your clarity of purpose?' - Alan's first principle for investment firms, emphasizing consistency between day-one purpose and current behavior.

6th Street has 'exactly zero' dollars in perpetual private BDCs despite having one of the best direct lending track records since 2001.

Responsible wealth channel investing requires wide apertures across multiple strategies and governors on capital inflows, not narrow single-strategy vehicles.

The industry needs recalibration toward prudent underwriting and matched assets-liabilities, which this crisis provides as 'a gift to the industry' during a strong economy.

Personal Organization and Facing the Tiger

Waxman's 'brain' system captures strategic priorities and tactical items on one handwritten sheet, updated weekly for 25 years to maximize 'return on time.'

The right-brain sheet captures creative ideas and themes, with annual reviews surfacing relevant concepts from years or decades prior.

'Face the tiger' means confronting problems head-on rather than avoiding them: 'When problems happen, we're like, good, let's go. Game time, let's go.'

'You get one life. Do you want to be average or do you want to be excellent?' - Alan's philosophy for thriving amid accelerating change and disruption.