Let's explore how Sixth Street thinks about risk and reward in their investments. Two different investments can deliver similar returns, but may come with completely different risk and reward profiles. One might be steady and predictable while the other is more volatile with real downside and bigger upside. So in order to compare these, one must unitize or have a framework for comparing risk and reward. Let's use American football as an analogy. On any given play, the offense has two primary choices. They can choose to run or pass the ball. Every play then results in yards gained or lost. And if you chart those outcomes and how often they happen, you get something like this. In blue are the run plays where most outcomes cluster in the middle, typically gaining between one and four yards on over 40% of the attempts. Losses do happen, but less frequently and big runs are rare, and that creates a relatively tight curve.

Now, compared that to passing in red, the most common outcome is actually zero yards with incomplete passes happening over a third of the time. But you also see a much higher frequency of big plays, gains of 10, 15, or even 20 plus yards. The result is a wider curve with a broader range of outcomes, and a coach is weighing the risk and reward of these options on every play. Sixth Street sees a lot of parallels in how they think about their risk reward approach to investing. If you keep the bones of this chart and change what's being measured, the shape doesn't go away. Just now, instead of yards gained on the X axis, you're looking at return on an investment. Unlike American football, Sixth Street isn't limited to two options like running or passing. They compare curves across asset classes, themes, sectors, and geographies to choose the right play.

For example, in investing, a 15% return isn't as simple as it sounds. It's actually just one point on a larger curve that Sixth Street views as the most likely outcome with the right and left sides being more or less favorable at lower probabilities. So it looks like a single number is actually a full range of possibilities based on infinite variables. Now, not all investments follow the same curve, particularly when comparing opportunities across asset classes. Some asset classes involve curves that are tighter with outcomes clustered closely around a base return, and that's what you tend to see in areas like investment grade or lending where consistency and downside protection matter the most. And this type of curve is analogous to how teams view running the ball in football. On the other end, asset or equity oriented investments tend to have much wider curves with a broader range of outcomes, more upside potential, and more downside risk.

Similar to the outcomes of passing the ball in football. When Sixth Street's Investment Committee evaluates a new investment, they assess a wide spectrum of potential outcomes and the likelihood of each. While they don't always draw a curve in a literal sense, these outcomes shown as dots on the graph together form an implicit risk reward curve. These curves are built through months of due diligence and relentless debate around risks and upside drivers, a back and forth discussion the firm calls playing tennis where every assumption gets challenged. On the left side of the curve, are downside scenarios, such as pricing shocks, supply chain disruption, new competitors entering a market, departure of key management talent or rising interest rates, and on the right side are upside scenarios like winning new contracts, achieving acquisition synergies, securing patent approvals, or secular tailwinds, accelerating demand. Every investment sector, geography, and asset class looks different. In reality, there are infinite variables that can impact an investment and countless potential outcomes or points on that curve. What Sixth Street does is seek to identify the most important of those scenarios and assign a likelihood to each one using their collective and diversified experience across the platform. The investment committee debates these risks and opportunities until the clear picture of the curve starts to take shape. And while drawing the curve is a critical first step, it's still just the beginning of how they approach every investment.