Alan Waxman

One group lost a bunch of money and we were anti, we didn't lose money.

And after that, the firm basically said, let's put all these disparate principal investing businesses.

Again, we didn't have outside LPs, put them all under one umbrella.

And that ultimately became what was a special situations group, which became a substantial part of the firm's profitability.

So we think about the relationship of risk units and return units.

So return units are easy.

It's IRR, it's duration.

Risk units are a lot harder.

If you think about the two key variables of, let's say, evaluating any company or security, you've basically got the cash flows, the volatility of the cash flows, so the risk of the cash flows, and growth.

So the way we think about it, and again, this has been refined over 25 plus years, our framework is basically we take three things.

First of all, what's the quality of the business?

What's the quality of the sector?

The second thing is where do you sit in the capital structure?

What we would say is your attachment points.

And the last thing is documents.

We take that framework and we sort of run that framework through that across sectors, geographies, and that's how we start to quantify risk units.

So for example, if you take a consumer goods company that's a buyout of a consumer goods company, and let's say a private equity firm buys it for a 20% return, and let's say they leverage 70%, you take a hyperscale data center that's got, let's say, a 15-year take-or-pay contract with an investment-grade counterparty,

That's going to be a required lower return.

So that'd be an example.

If you have a geography, let's say just as an extreme example, if you've got a 15% structured equity investment for a company, exact same company, exact same sector in Australia, if it were in Ukraine, you're probably going to demand higher than 15%.