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Bloomberg Television14 min

Observing Distortions in the AI Market: Sixth Street's Alan Waxman

Alan Waxman, Dani Burger

Interview
  • Sixth Street is currently avoiding direct investment in AI infrastructure, data center construction financing, and chip financing despite acknowledging the real demand and transformation occurring in the sector.
  • The firm's hesitation stems from three primary concerns that historically precede market dislocations:
    • A massive, rapid expansion of credit, particularly in data center construction financing, which has already led to banks attempting to sell assets due to market indigestion and concerns over document understanding.
    • Widespread speculative fervor and FOMO within the Silicon Valley venture and growth ecosystem.
    • Observable market distortions driven by supply-side constraints and capital allocation issues.
  • Specific market distortions identified by the firm include:
    • Power Constraints: A "math problem" where power procurement is insufficient, becoming more expensive, and taking longer, creating cascading market distortions prior to the midterm elections.
    • Insurance Capital Saturation: Insurance companies, traditionally the cheapest capital providers (5%–6.5% cost), are nearing capacity due to single-name concentration risks with top-tier credits like Microsoft and NVIDIA, forcing borrowers toward more expensive capital (8%–9%) from pension funds and sovereign wealth.
    • Chip Inventory Glut: Approximately $200 billion in chips are sitting in warehouses because data centers are not ready to deploy them, creating a mismatch for assets that depreciate over short periods (2–5 years) rather than long-term infrastructure.
  • The firm anticipates potential future dislocations that could manifest as:
    • Unwillingness by double-A credit providers to extend new financing.
    • Asset-liability mismatches, such as cloud providers contracting for chips that arrive before their data centers are operational.
    • Severity of dislocation depending on the degree of "connectivity" or "circularity" leverage within these massive asset and liability structures.
  • Sixth Street views the ultimate unit economics and ownership structures of AI infrastructure as currently "undecided" and evolving, suggesting the sector must pass through dislocations to reach a stable end state.
  • Unlike direct infrastructure investors, the firm sees value in the application layer, believing unit economics there will ultimately "crude" (crystallize/hold), and utilizes its flexible mandate to allocate across capital structures where relative risk is most attractive.
  • Sixth Street's current deal flow is driven by two major opportunities rather than direct AI infrastructure lending:
    • Stuck Private Assets: Approximately $4 trillion in corporate, real estate, and infrastructure private equity funds have expired and require solutions, creating a win-win for liquidity provision.
    • Growth and Dislocation in Tech: Opportunities in the "appocast" (application layer collapse) and growth capital for resilient technology companies.
  • The firm expects increased regulatory scrutiny on private capital following the midterm elections, anticipating a "healthy change" where proper vs. improper practices are more clearly distinguished, though specific outcomes remain unpredictable.
  • Sports media and entertainment valuations are being driven by supply and demand dynamics where a finite number of elite assets face robust demand from the top of the wealth distribution (K-shaped recovery).
  • Sports valuations are bifurcated into two distinct risk profiles:
    • Established Leagues (NFL, NBA, MLB, etc.): High support based on scarcity and the resilience of the wealthy class, though some value is divorced from current economics.
    • Challenger Properties: Higher venture or growth equity risk where some will succeed and others will fail.
  • Sixth Street notes that while sports are often viewed as an "anti-AI" asset, valuations remain tied to the broader wealth effect derived from the tech sector and the stock market.
  • The firm concludes that sports valuations may not necessarily be "toppy" unless an AI dislocation is severe, given the real underlying demand for sports content and assets.