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Last week Apollo reported earnings, and CEO Marc Rowan declaration of “the end of an era” for private equity naturally generating the most attention. But as Sonali Basak highlighted, he also made some interesting comments on private credit and its rising role in the financial system.
Some of it is just classic earnings-call bragging — implicitly calling Apollo the Michelin-starred restaurant of private credit — but most of it is genuinely intriguing. Given Alphaville’s interest in the subject we thought we’d reproduce the comments in full.
Here’s what Rowan told analysts on the call as part of his prepared remarks, courtesy of Sentieo/AlphaSense’s transcript services. With our emphases:
As I’ve said previously, private credit, these are 2 words that actually mean nothing. Private credit can be investment grade, private credit can be CCC. Barriers to entry in the private credit business are either quite low. Anyone with a fund and a staff capable of evaluating investments can truly enter the private credit business, or barriers to entry can be extraordinarily high, and building a full ecosystem that allows you to serve the needs of your clients in a very sophisticated way.
Think of the difference between a hotdog stand and a Michelin Star restaurant, both are in the food business and both serve food. That is how we think about private credit and where people are positioned.
Financial markets, financial literacy around private credit has actually gotten quite sloppy. What is private credit? Well, if we start in the abstract, everything that is on a bank balance sheet is private credit. But most of the time, markets — market pundits talk about private credit. They’re talking about a very small sliver of a private credit universe that’s focused on levered lending. Don’t get me wrong, we like the levered lending business. Levered lending is actually a terrific business right now. It will not always be a terrific business. It is a cyclical business with low barriers to entry, but one that, at the right point in time, can be very lucrative.
What we have tried to build is not a single fund, is not a single opportunity, we’ve tried to build an ecosystem. If I reflect on the past decade, we’ve invested some $8 billion, building 16 originating platforms. There are 4,000 people who work in these platforms, not Apollo employees, who are solely focused every single day on originating private credit. And as you know, much, if not most of what they do is investment grade. That’s important because the investment-grade market is at least 8x larger than the high-yield market and 8x larger than the levered lending market.
This is a great time for private credit. This is not a quarter that’s a great time for private credit, this is a secular change. Not only do we have higher base rates and regulatory change and change in market dynamics, we are in the beginning of a secular shift in how credit is provided to businesses and a shift that I believe will continue to gather speed. To be successful in this market, you need a recurring supply of unique origination. This quarter, we originated some $23 billion with 50% of that from platforms.
[Apollo co-president] Jim Zelter will detail some of these transactions. But in addition to the names you would expect that are traditionally associated with private credit, AT&T, Air France and Vonovia, borrowers value certainty, scale and speed to execution. In addition to origination, you need an integrated capital markets business. Because, after all, we want 25% of everything and 100% of nothing. Our ACS business, led by Craig Farr, has done an extraordinary job extending our reach of private credit to clients and to non-clients. And in fact, this is among the greatest ways that we introduce the firm to people who are not yet clients of Apollo and show them what we’re capable of.
This quarter, we raised some $7 billion of capital from third-party insurers, and we expect this to gather speed as the market continues to improve. For private credit, particularly investment grade, the way that consumers and businesses borrow is traditionally through the asset-backed market.
Asset-backed is, for the most part, private credit. This is a $20 trillion market, and one in which we have been playing for a very, very long time, more than $220 billion of volume to date, better than 200 relationships. We have currently more than $100 billion of AUM associated with ABF, $55 billion of which is third party.
Most of what happens for us in ABF is investment grade, and it is a key driver of our insurance business for Athene and for our third-party insurance clients, and increasingly, for fixed income replacement for our traditional institutional clients. One of the single most important factors in this market is that we are completely aligned with our client base. We own what they own, at the same time, at the same price. There is nothing that is more confidence inspiring than alignment.
Rowan later talked more about how “shadow banks” like Apollo interact with the traditional lending industry.
JPMorgan’s Jamie Dimon last month rued how firms like Apollo were “dancing in the streets” at the moment, but Rowan insisted that both parties were dancing together.
I really want to talk about the market environment, particularly the regulatory environment and the environment as it relates to our banking peers. In short, we have never had such a collaborative dialogue with the banking system. We have gone from not only being a great customer, a partner of the banking system, to a true collaborator.
The shape of our business, particularly our willingness to do very large investment-grade transactions, has made us an indispensable partner, and I do mean partner with the banking system. While some talk about the dancing of this being a great time for private credit, I’ve noticed that there’s actually been dancing on both sides, both on the bank and the private credit side, as most banks put in an extraordinarily good quarter and are on their way to an extraordinarily good year. We are also very symbiotic. Recall that we want the asset, but do not want what the bank typically wants, which is the customer. The bank wants the customer and typically does not want most of or any of the assets.
If I step back, the U.S. financial system is the envy of the world. We raised 50% of the world’s capital. And part of the reason we are the envy of the world is the structure of our system. Banks have their role, and the investment marketplace has its role. Our system has all types of participants, but the vast, vast majority of those participants borrow short and invest long or have short-term money.
Think of an open-ended mutual fund, which has daily liquidity. Many hedge funds, quarterly liquidity. Banks, daily liquidity at least on deposits. The ability to bring institutional investors, retirement systems and insurance companies who have long-dated liabilities or long-dated assets to this market make them ideal partners for the short-dated capital of the banking system and the open-ended mutual funds.
In short, long-term locked-in liabilities are a source of stability and somewhat countercyclical for our financial system. It does not matter whether they are in funds, which are themselves very stable, or they are on retirement services balance sheet. Totality of the market from the investor side does no maturity transformation, has no access to the Fed window, does not benefit from U.S. government guarantee.
And in our case, if you look at the retirement services balance sheet, we hold more Tier 1 capital and more Tier 2 capital than the vast majority of the top 10 banks in the U.S. We do cash flow testing and scenario testing and provide a granularity to our portfolio that very few institutions, if any, can match. Our balance sheet is much more investment grade than the typical depository institution.
In short, our model is highly complementary to the banking system. We have never been more collaborative, and I expect this collaboration to increase as regulatory change gathers pace, both in the U.S., Europe and even the beginnings of regulatory change in Asia.
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