The writer is a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’
To hear the chief executive of Apollo, Marc Rowan, tell it, there are still some misunderstandings about the rise and rise of private credit houses since the end of the global financial crisis.
Rowan came to this realisation after a recent overseas tour, where he met the CEO of one of the largest European banks. “I had never met him before,” Rowan told the Economic Club of New York on June 6. “It’s a blind date and sometimes blind dates can be fun.”
But he could barely get a word in before the bank CEO launched into a 15-minute diatribe about how Apollo, with some $600bn of assets under management, is the “beneficiary” of unfair “regulatory largesse”. And how, the CEO continued, Apollo and other lightly regulated asset-managers, such as Blackstone, KKR, Ares and others are part of the so-called scary “shadow banking” market, the wild west of finance. “So, are you done?” Rowan asked eventually when he could stand it no more.
Once he got the floor back, Rowan launched into a defence of Apollo and its business. He explained that Apollo had a “much higher percentage” of investment-grade debt on its balance sheet than did the European bank.
He emphasised that Apollo seeks to match its assets and liabilities from a duration point of view, unlike most banks, which borrow short and lend long. “And finally,” Rowan continued, “I hold more equity capital as a percentage of assets than you do. I hold more Tier 2 [capital] as a percentage of assets than you do, and if you want to see my portfolio, [you can] click on the website and my portfolio is online. So, if you’re done, now we can have our meeting.”
Rowan, one of the original founders of Apollo some 33 years ago, took over as CEO of Apollo in March 2021 in the wake of the ongoing revelations about Leon Black’s longtime ties with Jeffrey Epstein. He is a very young looking 60 years old and one of the savviest minds on Wall Street.
In the wake of the 2008 financial crisis and the passage of what is known as the Dodd-Frank law, private credit and equity groups have assumed a much greater role. The big banks — such as JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of America, and Citigroup — are no longer Wall Street’s pre-eminent innovators and risk-takers. And that is by design. The US Federal Reserve has made clear through its regulatory decisions that it doesn’t want these banks to ever again be at the centre of any future financial crisis.
As a result, the big Wall Street banks are much less leveraged than they were 15 years ago. They are forced to hold much more capital than they once did. They can still underwrite debt and equity securities — as the markets permit — but must move the securities off their balance sheets as quickly as possible. The Fed has forced the big banks to be in the moving business, not the storage business. The Fed has severely limited the kinds of acquisitions or mergers that once were so common among Wall Street firms, except apparently during exceptional circumstances.
That has opened up territory for firms such as Apollo, Blackstone and KKR to expand in. But, as Rowan discovered, when he met the European bank CEO, there is still the perception out there that less regulated “alternative asset” managers are swimming in a vast pool of risk, giving them an unfair advantage when it comes to making money.
Rowan said Apollo is making money the old-fashioned way: taking prudent risks where others no longer are willing to tread, such as in the senior secured financing of receivables, of aircraft, of real estate and of plant and equipment. “That is the private investment-grade market,” he said. About 75 per cent of Apollo’s assets under management are in private credit.
In short, Apollo does the kinds of things that GE Capital did once upon a time (before its demise) but without taking the existential risk of borrowing short and lending long. Over the past decade, Apollo has spent billions building out “origination platforms,” allowing it to underwrite senior secured loans in a variety of industries. Apollo keeps 25 per cent of the loans and shares the rest. And in 2021, Apollo fully merged with Athene Holding, the annuity insurance company it created in the wake of the global financial crisis.
With Athene, Apollo can raise funds cheaply by selling long-term annuities and then use that money to make senior secured loans at much higher rates. Its all done using very little equity, goosing the returns without the firm having to worry so much about deposits walking out the door or big moves in interest rates. No wonder these alternative asset managers are becoming the new powerhouses on Wall Street.
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