October 14, 2024 • 46 mins
Big tech stocks have had an enormous impact on the stock market, with Magnificent 7 companies like Apple, Microsoft and Nvidia now dominating equity indices and basically dictating the path of benchmark returns. And of course, there's been loads of discussion about the real transformational value of AI and whether it's all going to end up being one big bubble. But tech investing and big disruptive trends like AI aren't just for equity investors. They're playing out in the credit market, too. And of course, building the data centers and producing the chips that power AI requires huge amounts of capital — much of which is sourced via bonds and loans. Increasingly, a lot of that capital is coming from private credit players, one of the biggest of which is Apollo Global Management. In this episode, we speak with Rob Bittencourt, a partner at Apollo and co-head of opportunistic credit, about how the tech story is playing out and what Apollo is doing in the space.
Read More: Private Credit to Outperform in a Downturn, Apollo’s Zelter Says
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots Podcast.
I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Jill Wisenthal.
Speaker 2 (00:25):
Joe, do you remember those stories. I guess they were
a bigger deal earlier this year, but they're still kind
of out there, the stories about how the stock market
is all about the big tech companies.
Speaker 3 (00:36):
Yeah, absolutely so, I mean, yeah, it still is.
Speaker 4 (00:39):
It still is.
Speaker 2 (00:40):
But I think like at one point earlier this year,
there was a number that caught my eye. I think
it was like thirty percent of the S and P
five hundred came from the mag seven. So, you know,
off of that, Microsoft, Nvidia and all of those. And
I guess as all the hype and interest over AI
has grown, the import of tech companies in the equity
(01:02):
market has increased in size along.
Speaker 3 (01:04):
With it totally. You know, anything is an interesting stet.
We're recording this on September twenty fifth. If I look
at the major stock in the seas for the year,
the NAS deck or as we used to write the
tech having NAZ deck is up twenty eight point three.
The S and P five hundred is up twenty point
three five percent, virtually the same. So I think it's
telling the degree to which the S and P is
(01:27):
becoming the nas Deck in fact that we should that
would be a good story or great headline.
Speaker 1 (01:32):
Yeah.
Speaker 3 (01:32):
Basically, the S and P, by virtue of the dominance
of these handful of megacap tech companies that dominate both index,
the S and P five hundred is morphing into the Nasdaq.
Speaker 2 (01:42):
Listeners, you get to witness how journalism happens in real time.
You come up with Heplin, you.
Speaker 3 (01:47):
Notice some numbers, and you're like, oh, let's see if
we could back a story into that.
Speaker 2 (01:50):
Okay, Well, speaking of everything becoming tech, I realized that, like,
one thing we haven't really spoken that much about is
what tech and all the recent enthusiasm for it actually
means for the credit market, for the world of corporate bonds.
Speaker 3 (02:05):
Yeah, this is interesting, and there's probably a reason that
we don't think about this very often, which is one
is that if you look at like the really big
tech companies and even like small companies, you know, a
lot of it has not historically been credit funded. A
lot of it has been equity funded, and VC is equity,
and you know, these companies produce so much cash from
(02:26):
their earnings, and they can fund themselves out of earnings.
That credit to some extent hasn't been part of the story.
But a few things a you know, some of these
companies mature and they start to issue debt, and they
do have debt, and some of it's to fund buybacks.
We're also in a period where a lot of tech
is more capital intensive than it had been in the past,
and sort of project based financing is more of an issue.
(02:47):
And maybe that's like it sort of you know, some
of the data center plays, et cetera. So I believe
there are interesting credit stories that, for reasons I can understand,
have not gotten much attention.
Speaker 2 (02:57):
There definitely are interesting credit stories, and I am very
pleased to say we have the perfect guests today who
is going to tell them. We are speaking with Rob Bittencore.
He is a partner at Apollo. He is the co
head of Opportunistic Credit. He's also a member of a
bunch of different investment committees over there. Rob, thank you
so much for coming on all thoughts.
Speaker 4 (03:17):
Tracy, Joe very excited to be here, longtime listener, and.
Speaker 2 (03:20):
Fan ah right, thank you. So let me ask the
basic question, but what does the co head of Opportunistic
Credit at Apollo actually do? Opportunistic credit sounds like you know,
something you might get at college. What is it exactly?
Speaker 4 (03:36):
So before I describe what I do within opportunistic credit,
I think it makes sense just a level set. Where
does that sit within the broader appall uplat platform. So
you know, Apaulo is an alternative asset manager and a
retirement services business. It manages about seven hundred billion dollars
of AUM, five hundred of which sits in our credit business.
And I focus on the opportunistic pool of capital, which
(03:59):
is about thirty billion dollars. So what is opportunistic It
is not as bad as you make it sound. It
is really credit investments on both public and private side,
targeting returns of eight to thirteen percent broadly speaking. So
in terms of what I do within that business, I
co lead a group of twenty analysts who are sector
(04:22):
focused and really are tasked with identifying, sourcing, and underwriting,
you know, the ultimate investments that go into a series
of funds that make that thirty billion dollar AUM pool
of capital that I mentioned.
Speaker 3 (04:34):
So it seems like you know I mentioned that, you
know you do have debt issued by tech companies, and
sometimes they run across the headlines. Sometimes you read like, oh,
Apple is selling a bomb yourself to sure these do
not sound like exciting areas for opportunistic credit at that
level because they're pretty close to like triple a rate,
Like if I'm lending to Apple, it's like the next
(04:55):
closest thing to probably lending to the US government in
terms of the spreads and.
Speaker 4 (04:59):
Stuff like that.
Speaker 3 (05:00):
So when you talk about like opportunistic credit and the
opportunity to actually get those like substantial return as you said,
eight and thirteen percent, are where are we typically looking.
Speaker 4 (05:11):
When I joined aupoll on two thousand and six, high
yield and the lever loan market were not synonymous with technology.
People thought of those as ways for slower growing companies
to finance themselves, companies that produce consistent, dependable cash flows.
Fast growing companies typically didn't look to the sub investment
(05:31):
grade market for financing. But that's steadily changed over time.
So if you look at a lot of the private
equity activity, which is a huge source of credit that
goes into the hy old market, about twenty five percent
of LBO activity today is in that technology space, and
that's steadily increased over the past ten or fifteen years.
(05:51):
It was about twenty percent before the pandemic. So that's
mostly been in software related names.
Speaker 3 (05:56):
Yeah, right, So there are various p firms that are
buying these of middle markets type software company.
Speaker 4 (06:02):
Or even larger multi billion dollar companies increasingly, so the
scale is certainly there. Today, about fifteen percent of the
levered loan market is software related. There's less of an
exposure in the higal bond market about five percent is
technology related. But I do think you have that critical
mass of technology names in both markets today. Obviously not
(06:23):
as intense as you see in the equity markets, but
it's definitely a market that's become more tech focused during
my career a topolla.
Speaker 2 (06:31):
So what does that mean for the things that Apollo
specifically is buying. The growth of the private market, the
rush of private equity money as well, does that translate
into specific things that you're doing, such as direct lending?
Speaker 4 (06:46):
Sure? So, a lot of what we've been talking about
right now is with respect to below investment grade, and
you talked about the fact that the larger hyperscalers have
largely self financed themselves or have gone to the public
ig bond markets. I think some of the more recent
technology themes that we've seen, namely AI, which I know
(07:07):
something you all have spoken extensively about. I think what's
interesting about this trend relative to maybe more recent technology
trends like smartphones and mobile computing, which was relatively asset light, right,
it was developing applications that sat on top of Android
and iOS, which didn't really require a lot of capital. AI,
(07:28):
which I think you referenced before, is very capital intensive.
You need to build the data centers, you need to
build the power to support those data centers, you need
to build the chip making facilities, to build the GPUs
which are used in the data centers, and that is
all going to require capital. A lot of that capital
is not going to be provided by the high yield markets.
Where it will be provided, in our view, is from
(07:49):
the private investment grade market, which you know, when people
think of private credit, they don't necessarily equate it with
investment grade. But as an institution, over half our credit
AUM is associated with our retirement services business, a theme
which invests primarily in long duration investment grade credit, and
(08:11):
so I think there's a huge opportunity for Apollo and
others to invest those pools of capital that are looking
for long data investments, high quality behind some of these themes,
and I can go into more detail around that if
that's helpful in terms of some of the areas we've
been focused.
Speaker 2 (08:27):
I have one question just before you do that. But
if I'm an investment grade issuer, certainly, if I'm an
Apple or someone like that, why would I want to
go into the private market to begin with? I'm IG,
I can sort of, you know, dictate my own terms. Presumably,
why would I even go down that route?
Speaker 4 (08:45):
Yeah, I mean, Apple's a tough one, just because it's
probably one of the highest rated companies in the world
and one of the most problems take an average, average
IG company. I think there's a couple of reasons. One is,
some companies want a diversity of financial sources, right, They
want toinance themselves both in the private markets and the
public markets, and so having access to multiple avenues of
(09:05):
capital is just good risk management. I think specific to
some of the themes we're talking about, and some of
this project based financing, it's complicated, right. The underwrights they
take a long time, they take detailed diligence. Oftentimes, when
we're looking at these sorts of opportunities, we're bringing in
third parties to help us analyze the situation domain experts.
(09:28):
So that's really hard to do on a syndicated basis.
You know, the investment grade public bond market prices on
a daily basis, right, it's called a drive by a
company will come in, hit the market, move on. For
some of this project based financing, that speed doesn't really translate,
and it really requires bilateral negotiation and partnership to ultimately
(09:48):
structure these deals which have more complexity than your regular
way publicly traded bond.
Speaker 3 (09:54):
Before we talk about some of these project based deals
or these CAPEX heavy AI related things, just going back
to you know, you mentioned in the mid two thousands
the sort of rise of PEBAC purchases. How much of
that market emerged as a function of software as a service,
specifically paying for software with subscription revenue. You have something
(10:17):
maybe like you know, something that does dental billing. You
get it an eighty percent of dentist office and then
it's like, okay, it would take a lot for this
piece of software to ever get uprooted, and so let's
just lever it up, put a lot of credit onto it,
and then you have this fairly predictable revenue stream for
years and years.
Speaker 4 (10:35):
Okay, I think software as a service has smoothed out
cashflow profiles. It's made those cash flow profiles more predictable,
which credit investors like. And it's a relatively capital hite model.
There's not a lot of capex associated with these businesses.
And as you mentioned, you know, many of these software
applications are very much embedded in the workflows of enterprise.
(11:00):
Isn't very hard to switch out, which is why you
have very high retention in a lot of that market.
So I think that's certainly one of the reasons why
that sector has gained so much popularity amongst some private
equity firms.
Speaker 2 (11:10):
Okay, so we sort of outlined the growth of SaaS
in credit markets, but talk to us about the growth
of I guess ai related tech in the current credit market.
What impact is that actually having.
Speaker 4 (11:24):
Within below investment grade few and far between. Recently, we've
seen some excitement around increased bandwidth needs for data centers,
so connecting the data centers that are being built. So
there's a couple of companies that operate enterprise fiber optic
networks that have benefited and that have announced some partnerships
with some of the hyperscalers. So I think that's a
(11:46):
tangible example of some of this infrastructure build out infiltrating
the high old markets. I think beyond that, it's really
been more angst inducing, honestly, with a lot of investors
trying to figure out, you know, are there going to
be losers?
Speaker 5 (12:00):
Right as this technology the disruption story exactly right, and
I still think we're in the first or second ending
with respect to determining who the losers are going to
be from this technology.
Speaker 4 (12:15):
There were some announcements earlier this year around Klarna, which
was using AI chatbots for some of the customer service needs,
which created some volatility and some of the call center operators.
So I think that would be an example of a
sector that has felt some impacts from AI, but for
(12:35):
the most part it's been somewhat limited.
Speaker 2 (12:52):
Joe, this reminds me of one of the fundamental realities
of credit investing, which I think came up in a
recent episode with Oak Tree's Danielle Paul. But really a
lot of it is about trying to avoid the losers.
Speaker 3 (13:04):
Our brains went to the same place, right, So when
you're picking a tech stock, you want to pick the winners,
and when you're lending their companies, you want to avoid
the losers. Which sort of brings me to exactly what
I was going to ask you, which is like all
credit investing, but all investing is going to have some
sort of like you look at the balance sheet, you
look at the cash flows, you look at the metrics,
and then some subject matter domain expertise.
Speaker 4 (13:26):
And again, if.
Speaker 3 (13:26):
You're picking stocks, you're like, no, this is the company
whose chip is going to be the winner. This is
the company whose liquid cooling system for data centers is
going to be the winner. Is the nature of sectoral
analysis from a credit perspective a little different because it's
about loser avoidance.
Speaker 4 (13:44):
So certainly there is less asymmetry just mathematically in bond
investing or in credit investing, right, your upside is capped.
It's not necessarily capped at par. By the way, depending
on the call schedule of a bond, bonds can trade
over par. You don't have the asymmetry that you have
in the equity markets. So through that lens, I do
(14:05):
think there's more of a downside protected mindset that credit
investors bring to bear. I think you touched upon understanding
the major trends and themes in a sector. That's something
we spend a lot of time thinking through because of
that risk that technology can potentially play from a disruption perspective. Right,
(14:26):
you know, what are the major themes around technology in
the market today and how is that going to influence
individual sectors? And that gives you a little bit of
a guidepost in terms of maybe not what sectors to
entirely avoid, but where to be very careful as you're making,
you know, analyzing the opportunities in a particular sector. You
(14:46):
see that dispersion very much in the market today, right.
If you look at the high market, which is trading
about three hundred basis points from a credit spread perspective,
and you look at the sectors that have the high
proportion with spreads above a thousand basis points, it's cable satellite,
(15:06):
it's telecom, and it's broadcast TV. And in some instances
you see those heightened credit spreads because there's too much
leverage on individual companies. But I would suggest that there's
clearly something sectorial going on in those sectors. That's creating
some headwinds, which is leading to those elevated spreads.
Speaker 2 (15:26):
So, speaking of losers and disruption, could you maybe walk
us through a specific example of like, suddenly there's this
new thing and it impacts a different credit. Are there
specific instances that you've observed?
Speaker 4 (15:39):
Sure? So a recent example would be the satellite industry. Yeah,
say more about that, right switch company. Oh in starlink
impact right elon musks. It's a subsidious SpaceX. Starlink operates
the largest low Earth or a bit constellation of satellites,
providing broadband at higher bandwidth than legacy technology with lower latency.
(16:03):
Incredibly disruptive to some of the existing satellite communications providers.
Speaker 3 (16:08):
Well, it's a name of one. I'm going to pull
up a ticker.
Speaker 4 (16:09):
On my terminal. SEES is one of the largest names
in the space. They recently merged with Intelsat okay, thank you.
And there's a group of about five or six of
those players within that sector. And so that's a very
tangible example of a new entrant with a new technology
that has advantages relative to the existing technology, which has
(16:32):
created some headwinds in the broader space. Now, I do
think the industry, and this is a trend that we
tend to see oftentimes, when new technologies disrupt a sector,
you actually do see more consolidation because it's a way
for the industry to adapt effectively by getting larger cutting
(16:55):
costs and then hopefully figuring out a way to better
compete against the new entrant market.
Speaker 2 (17:00):
You kind of anticipated my next question there, but what
happens to pricing in these scenarios and how quickly do
existential threats to a business model get priced into a
company's corporate bonds or loans or whatever they might have outstanding.
Because I feel like, on the one hand, if you're
getting a major competitor in the form of Elon, Musk
(17:22):
and Starlink, that's bad. But on the other hand, credit
markets are notoriously slow compared to stock markets, and on
the other side, it can spark defensive measures, consolidation or
cost saving, which would be very, very valuable if you're
a lender to this company.
Speaker 4 (17:43):
I think the market reaction time has increased over the
last five years, and I think the reason is the
first widespread example of disruption in the credit markets was
retail and everybody knows it, Amazon e commerce its pretty
sure store all of that dead malls, and I think
(18:05):
that played out from sort of maybe twenty twelve to
twenty eighteen. You had a spate of bankruptcies and retail failures,
and I think the market realized that, you know, it's
hard to necessarily fight against a secular trend that powerful,
so we better start paying attention to it. Interestingly, I
(18:25):
would argue sometimes the market overreacts right and so counterintuitively
it could create interesting long opportunities. A great example, in
our opinion is the cable industry. So cable industry did
very well during the pandemic for obvious reasons. There's been
some normalization post pandemic that's impacted their business. But from
a secular perspective, the industry's face competition from a lot
(18:48):
of the old line telecom companies starting to build out fiber,
which has created more competition. You've also seen the likes
of Verizon and T Mobile offer home broadband over the airwaves. That,
on the margin, I think has created this narrative disruption
within the cable space, which has created quite a bit
of volatility within the capital structures. We still like the
cable space. We still think it has a lot of
(19:10):
really attractive attributes. It's typically duopoly market in each region
produces stable, consistent cash flow in the hierarchy of needs.
You know, it's sort of air, water, food, cable, cable, broadband,
and so we use that as an opportunity to lean
into the industry over the past you know, eighteen months.
So it's not all bad news, per se. I do
(19:32):
think sometimes the market tends to overreact or maybe act
too soon, right, Sometimes these trends do take quite a
bit of time to play out.
Speaker 3 (19:41):
No, I mean this makes a lot of sense. Like
we can all look at say like, oh, you know
what Elon Musk is putting satellites into space. This is
going to allow me to cut the cord at home,
et cetera. Well, we're probably overestimating when I just tell
that story the speed at which I'm going to do that.
And I guess, like, just internally, maybe there's a better
solution for me, But it would take me a while
(20:02):
to get comfortable with the idea of just like cutting
off my broadband internet excess in their apartment.
Speaker 4 (20:07):
Inertia is a very pet can be a very powerful force.
Speaker 3 (20:10):
I pay for a lot of things. Tracy and I
just like, I don't know why, and then I get
a bill and it's like some app I downloaded three
years ago, And.
Speaker 2 (20:17):
Yes, there is that annoyance.
Speaker 4 (20:19):
Okay.
Speaker 2 (20:19):
So, speaking of other things that have happened in recent years,
a big one has to be the influx of government
money into tech related areas, so data centers, also clean
energy technology, things like that. One thing we often hear
when it comes to fiscal spending is the idea of
crowding out the private market. And I'm curious, as someone
(20:42):
who sits at Apollo and is basically in charge of
directing a bunch of private capital, is that something you
notice or worry about at all.
Speaker 4 (20:52):
We haven't seen any signs of that at this point,
but certainly the fiscal situation from a macroeconomic perspective is
something that at a high level we're constantly watching. Clearly,
I think the budget deficits at two trillion dollars, which
would seem to be unsustainable if it continues, you know,
in perpetuity. But haven't really seen a crowding out effect
(21:14):
per se, you know. If anything, I think, you know,
some of the more recent government programs that have targeted
investment in specific sectors that are deemed to be strategic
has been a positive development in terms of attracting crowding
in crowding in almost attracting private capital alongside you know,
(21:36):
the government investment. So you know, whether it's the Chip Act,
which allocated fifty billion dollars to construction of the domestic
semiconductor supply chain, I think that certainly had a positive impact.
You have the Bead Act, which is looking to extend
broadband in rural communities. I think you've seen a lot
of cable providers and other telecom providers talk about the
(21:59):
opportunity there to to potentially utilize that. And then obviously
the Inflation and Reduction Act has clearly focused resources on,
you know, the build out of the clean energy infrastructure,
and I think those aligned very much with some of
the major themes in the economy and the infrastructure needs
in the US, and so as a firm, you know,
(22:19):
we're very much focusing on those sectors. With respect to semiconductors,
we talked a little bit about it, but you know,
recently we announced eleven billion dollar joint venture with Intel
around one of their leading edge or their leading edge
facility and Ireland, which you know, I think is part
of that major trend of bringing back or making sure
(22:41):
that we have you know, stable, secure supply chains for
critical industries like semiconductors.
Speaker 3 (22:46):
Going back to satellites for a second, if a legacy
satellite issue and we're not going to name any names,
go bankrupt or something like that. You know, obviously, as
credit investors, you think about collateral and there are obviously
assets that a satellite provider would have. However, if a
satellite provider were to go bankrupt, it might be because
(23:07):
those satellites just aren't competitive anymore or whatever. How do
you think about the value of assets that you could
seize in a bankruptcy when there is a question that
the reason that the company went down is because that
technology is no longer competitive.
Speaker 4 (23:22):
So in a vacuum, it's it's hard to answer that question,
just you know, because it's so fact specific and situational.
Speaker 3 (23:28):
So talk to us about how you might Right.
Speaker 4 (23:30):
So Intel sat did go backrupt.
Speaker 3 (23:32):
Oh yeah, all right, Risco, let's talk about that.
Speaker 4 (23:34):
But it was a little bit of a different situation
given they had quite a bit of wireless spectrum that
was in the process of being repurposed to support wireless Networks,
which was a huge asset for the estate that ultimately
you know, helped underpin the reorganization of that company, which
has been very successful by the way, as I mentioned before,
it's been acquired through a merger with SES. But we
(23:57):
generally try to avoid sort of secular loser, if you will,
because in my experience, predicting decline curves and businesses that
are facing significant headwinds and technological disruption can be really challenging.
If there is like true fundamental disruption versus angst inducing
headlines that might not answer your question directly. Generally we
(24:19):
want to avoid those sorts of situations if we are
in a position, you know, we are invested behind a
company that may face some of those challenges. Thinking more
broadly across the industry, as I mentioned before, disruption tends
to be a catalyst for consolidation. Thinking through the potential
value of those assets as part of another company can
(24:41):
be one way to frame, you know, downside valuation.
Speaker 2 (24:44):
In our experience, I'm going to jump to the polar
opposite of downside valuation and talk about upside valuation because
(25:07):
certainly in the stock market there is this ongoing discussion
about all the hype around AI and tech and whether
or not at an extreme level it might be a
bubble or at a minimum it is potentially overvalued. Do
you see that kind of angst in the credit market?
And I'm thinking specifically if you're talking about new technology,
(25:30):
often there's a lot of uncertainty embedded in these business models,
and you see a lot of CEOs talk about like
total market size, and maybe they start acquiring other companies
and they start doing things like ad backs which affect
their credit profile and things like that. But how are
you sort of separating reality from future value specific AI
(25:53):
or specific to tech. But we could definitely talk AI
would seem to be a prime example there.
Speaker 4 (26:00):
I think it's early. I think the quantum of investment
that is being allocated the associated infrastructure is unprecedented. There
are a lot of estimates, but broadly speaking, one gigawatt
of data center capacity costs about ten billion dollars to build.
(26:20):
I've seen estimates that AI is going to require over
one hundred gigawotts of capacity to be built.
Speaker 3 (26:27):
So is that a trillion it's trillion dollars.
Speaker 4 (26:29):
And that doesn't include the GPS that go into the
data center. Then you have to talk about the power
that's going to be needed to support these data centers.
A gigawot of natural gas power production cost a billion dollars,
a gigawot of solar production cost a billion dollars. The
last nuclear plant built in the United States was about
(26:50):
five gigawotts. It costs thirty five billion dollars. These are
huge numbers, and so that's real, right, Those dollars are
going to be spent. And I think the sponsors of
this technology, which are largely the hyperscalers, have very, very
very deep balance sheets, right, and so I think that
(27:12):
is going to give a durability to the trend and
instill a patience, if you will, versus other technology cycles
we've seen, which have been very dependent on the public markets,
the equity markets. You know, the Amazons and the Metas
and the Googles can afford to play, and the Microsofts
can afford to play the long game. So when will
(27:33):
this translate into tangible revenue? I don't have a strong
view on that, but I do think that the market
will be relatively patient. From that perspective.
Speaker 3 (27:43):
Let's talk more about this build out of data centers
than specifically one of the things that I've seen some
headlines about and I'm not entirely sure whether they're real.
It kind of seems like maybe it's being overegged a
little bit. GPU backed loans and some of the day
centers like, hey, you know what, Michael bust but then
you can have our Nvidia Blackwell chips something you do.
Speaker 4 (28:05):
Whatever?
Speaker 3 (28:06):
Is that real? Is that a thing that's going on?
Speaker 4 (28:08):
It absolutely is say more about that. I don't want
to name sort of company names because I don't know
it's been like publicly disclosed.
Speaker 3 (28:15):
We talked to the core weave cso for example, they're
a big player.
Speaker 4 (28:18):
In this, So we've looked at those opportunities before. I
understand the attractiveness of the opportunity. In many instances you
have high quality counterparties that are utilizing those GPUs. Yes,
I think is part of the credit support for those loans.
If you do believe that there is this really unprecedented
(28:39):
secular push to build out associated capacity that should be
supportive for the underlying value of these chips. The counterpoint
would be these are new markets. You know, people I
think don't really have a lot of empirical history to
point to in terms of determining what they may be
worth under various scenarios. So, but clearly there's going to
(29:01):
need to be a financing solution if all that data
center capacity does get built out, because you know the
numbers I mentioned, you know, trillion dollars, you know, multiply
that by one plus to determine what the associated costs
of the GPUs required in those data centers. And that's
not all going to be equity financed. So it wouldn't
(29:22):
surprise me to see that market grow further.
Speaker 2 (29:24):
So I'm old enough to remember when we have the
first securitization of solar panel leases. I think it was
by like Solar City or someone like that, and that
was that was such a novelty at the time, and
I'm pretty sure I wrote a story that was like
Sunshine backed bonds, hahaha. But in general, are you seeing
(29:44):
a resurgence in asset backed securities ABS for some of
these tech related investments just because of the scale of
the investment that's needed and maybe some of the interest
in collateralized lending.
Speaker 4 (30:00):
So there's definitely a developed market for data center backed
ABS issuance. It's a relatively small market, so it's clearly
going to have to grow if all this capacity does
in fact get built out. We have continued to see
innovation in the ABS space. I talked about the build
out of fiber that's occurred and some of the challenges
that's created for the cable industry. That is a market
(30:23):
that now is accessing the ABS market, where companies that
have built out residential fiber are taking those assets and
effectively dropping them into securitization vehicles and then raising capital
at attractive rates relative to what they could raise in
the public high you bond market. So the market is
very creative at meeting needs, and so I would suspect
(30:43):
that you're going to see over time more ABS type
structures in addition to the role private credits going to
play in financing these projects is part of the funding solution.
Speaker 3 (30:54):
By the time this episode comes out, we'll have recently
released an episode on Talk You a Lot about the
nuclear build out or this hope that many people have
for some sort of nuclear revival, and we recently had
the news of the Microsoft would committed to buy a
bunch of energy from Constellation to turn back on one of
the reactors at Three Mile Island and there is a
(31:16):
real like chicken and egg problem here because the nuclear
players need to have that guaranteed demand. And also it's
risky to build a new reactor because we've were out
of practice as you mentioned, and so forth. Is that
going to create any opportunities as you see it, like, okay,
if there is some momentum that gets going for some
of this like difficult construction projects, is that something that
(31:40):
you could see coming across your screen that space.
Speaker 4 (31:43):
Absolutely. I mean so a little bit out of my element.
Not a nuclear power expert, so I don't want to misspeak,
but I think the consensus is it's unlikely that in
the near to medium term you're going to see the
construction of a large scale nuclear plant here in the
United States. I do believe that there's opportunities to increase
(32:04):
the capacity at existing facilities as well as restart brown
field facilities. So I think that's clearly going to be
part of the solution. But to the extent a market
does develop for green field nuclear projects in the US,
(32:24):
the cash flow profiles the long duration nature of these assets.
The size of the investment opportunity fits in very nicely
with the pools of capital that we manage primarily within
our retirement services business.
Speaker 3 (32:38):
But one of the things they've in energy is that
in certain areas there is a need for project based finance,
but the market doesn't exist. So another thing we talked
about recently on a show is a geothermal for example
in these projects, which is sounds very good in theory,
but I don't know, there's a lot of money. What
does it take for a new market to build? Because
it seems like a chicken and an egg problem to
(32:59):
some extent, which is that, Okay, you don't you know,
here's a new idea. We're going to like put a
bunch of pipes in the ground and get heat out
of the earth and that's going to create all this power.
But it's novel, and it seems a little bit untested
and it's immature. But in theory it could produce stable
cash flows, and you know, there's some reason to think
just like maybe talk us through like if there's a
(33:19):
market that doesn't exist yet in real scale, but there's
reason to think it could. Like what is the process
by which the credit markets could agglomerate onto a new area?
Speaker 4 (33:30):
So I'm speaking generically, yeah, Geneeric, Yeah, totally, Geothermal so
in some instances, the government is sort of the entity
that's priming the pump. Right, So you mentioned geothermo I
assume you're your referencing geothermal the utility.
Speaker 3 (33:43):
Scales, Yeah, utility scale.
Speaker 4 (33:47):
But if you look at the IRA, yeah, you know,
one of one of the provisions provides you know, tax
credits for you know, the build out of geothermo oh
kind the residential process. So and that's example of how
the government can play a role too. You sort of
fan the flames of a new technology. In terms of
the role the credit markets has to play, the reality
(34:07):
is if the technology isn't commercialized, it's you need to
go to the equity markets first, right, Like it doesn't
really necessarily fit the return profile or the downside protection.
I should say that that a credit investor is typically
looking for, so you know, typically the migration as you
start in the equity markets, you commercialize, generate free cash flow,
and then go from there and start accessing the credit markets.
Speaker 2 (34:30):
Going back to nuclear for a second, One other thing
that happened recently in addition to the announcement about three
Mile Island is there was an announcement from a bunch
of pretty prominent banks saying that basically they were really
into nuclear power now and they would throw their weight
behind it. And setting that specific sector aside. I'm curious
(34:53):
how much competition you see from banks in the overall
credit market and how that might have changed changed in
recent years.
Speaker 4 (35:02):
Absolutely so clearly the trend of you know, more lending
activity moving out of the banking system into other sources
of capital. We're talking about it now, but the reality
is in our our chief economist, Tourist and Slock had
a great graph which basically it showed the percentage of
non financial lending that resided in banks, and it hit
(35:24):
its peak in nineteen seventy five at fifty So fifty
percent of the non financial lending in the US economy
was done by banks. Two thousand and seven was thirty percent,
twenty percent today. The point is, this is a trend
that's been going on for fifty years, so long before
Dodd Frank, Long before Dodd Frank and all the financial
innovation you mentioned securitization. That's one technology or financial technology
(35:47):
that moved risk off bank balance sheets. The creation of
the leverage loan market in the early two thousands and
the late nineties. Another mechanism that moved risk off of
bank balance sheets into investors' hands. And I think private
credit is just another arrow in the quiver that is
supporting that trend. Now more recently recently defined as POSTGFC.
(36:11):
You've had changes in regulation which clearly have accelerated that
move and have forced banks to de emphasize certain behaviors.
So banks are still going to be an important part
of the extension of credit in the United States beyond
like the investment horizon and reasonable investment horizon that we
can talk about, and so I think private credit is
(36:33):
just one more tool or mechanism that allows for that
diversification of the provisioning of credit outside of the banking system. So,
you know, banks are oftentimes partners, not competitors in a
lot of situations because they have corporate relationship, but they
don't have the appropriate capital to meet the needs of
(36:54):
that corporation. So we can actually partner together and provide
the capital, they provide the relation, and you know, both
sides are benefiting as a result.
Speaker 2 (37:03):
Speaking of relationships, so this was something else that I
really wanted to talk to you about. You're the head
of Opportunistic Credit. How do potential opportunities actually land on
your desk. Is it like a company or a bank
would come to you with a specific need or suggestion,
or is it your team of analysts who are you
looking at outstanding issuance at the moment and like finding
(37:26):
things they think are maybe mispriced or where there are
arbitrage opportunities or that sort of thing.
Speaker 4 (37:31):
All of the above. So, as I mentioned, I work
with a team of about twenty investment analysts. We've never
quantified exactly where the ideas come from, but I would
say fifty to sixty percent is being sourced by the analysts.
As I mentioned before, sector focused. So really what that
means is they're tasks with knowing everything about three or
(37:53):
four sectors, knowing the management teams and the companies in
those sectors, knowing the major trends in those sectors, and
through that process they're just naturally going to identify interesting
opportunities on both the private and the public side. In
addition to that, myself, some of the other credit partners,
our trading team, which is constantly interfacing with a seal side,
(38:14):
is serving the broader market to try to identify opportunities.
And then I think something that's somewhat unique to Apollo.
We have a very collaborative approach across our different businesses.
We have a large credit business, we have a large
equity business, we have a large hybrid business. So those
teams work very closely to share ideas because we've had
(38:35):
many situations where a company will come with an ask
from our a hybrid team about some sort of preferred
stock investment. You know, they want some sort of preferred investment.
The numbers don't quite work for either the company or
for us, but perhaps a secured credit and instrument does
(38:56):
work for both, at which point you know, the opportunity
will transition in into my team. So the goal is
to make the top of the funnel as wide as possible,
So we're looking as many opportunities as possible. You know.
I like to use the sort of metaphor that we're
panting for gold, right, so when you're painting for gold,
you want as much soil, if you will, in the
pan to find those top opportunities.
Speaker 3 (39:17):
Very minor thing, but just an interesting you know. And
when I hear the word analyst in my head, I
just think of someone who's like looking at spreadsheets and
tweaking numbers. And seeing how different prices at the end
of the spreadsheet change with different assumptions. But part of
the job at an analyst at an established institution like
Apollo is also on the sourcing side and getting to
(39:40):
know these companies and that when one of these companies
needs financing for whatever reason, they have built that relationship.
Speaker 4 (39:46):
Absolutely interesting, which is why regardless of where AI goes,
it will never fully disrupt, you know, the financial analyst
industry because it very much is a process an art,
it is art science. I think it's a little bit
of both. That involves just you know, building human relationships
(40:07):
with you know, with management teams, with experts in the industry,
with the cell side, with the banks, with our peers
on the buy side, so critical part and it's also
one of the interesting things that I've noticed. And I
started as an analyst, so I you know, that was
my first job from two thousand and six to like
(40:27):
twenty fourteen, and then I started doing other stuff. When
I started, it was very much you listen to the
conference call, download the ten K and ten Q and
it's amazing how much more information is available today and
it's not necessarily from the sources that you'd expect there. Obviously,
(40:48):
you know, there's there's industry research that you can access,
there's expert networks that allow you to talk to experts
in a specific industry. But it's even broader than that.
It's sometimes you get domain experts to write a really
interesting blog on a specific sector. Podcasts, you know, not.
Speaker 2 (41:05):
To you know, go ahead, and that's fine.
Speaker 4 (41:09):
Podcasts are actually an amazing way to learn about a sector.
Right just go to Spotify or whatever your platform is,
you know, search for a subject and you can hear
forty minutes from a domain expert YouTube. Even so, the
amount of information that's available has only expanded. It's sometimes overwhelming,
but I guess the point I'm trying to make is
beyond developing those personal relationships with key operators in a sector,
(41:34):
it's also just expanding, you know, the sorts of information
that you're intaking, because it's certainly it's amazing how much
more information is available than than when I started.
Speaker 2 (41:44):
Well, on that note, subscribe to all thoughts everybody. No, Rob,
that was fantastic, Thank you so much for coming on
the show. Really appreciate it, my pleasure.
Speaker 4 (41:53):
Really enjoyed the conversation. Joe.
Speaker 2 (42:08):
I'm really glad we did that episode because again, so
much of the focus is on what tech means for
the equity market. It was really good to get a
different perspective. And as you said, like instead of identifying
the winners, the focus is very much on identifying the losers.
So that was interesting. One thing that also struck me
when Rob was talking about the scale of the capital
(42:30):
investment needed and how that fit into the discussion over
hype and future revenue street, it does sound like, dare
I say it, maybe things are a little bit different
this time, just because, as he was pointing out, the
size of the dollar amount that's needed is so huge
(42:51):
that you might not get this massive influx of players
into the market because like the starting point for all
of this is so high. So I wonder if there's
like maybe more of a moat around the business than
there was when it comes to for instance, software.
Speaker 3 (43:09):
Well, I mean the analogy where you'd reach back to,
I think is the telecom build out in nineteen ninety
eight to two thousand and two, and there you had
this huge over investment in cable or various versions of
cable copper specifically as they called it back then, and
there was a massive over investment and a bunch of
stuff in bankrupt and then we all sort of know.
(43:29):
I forgot about several years. But it's interesting that you
bring up the scale requirement because the entities that really
got hit hard in like two thousand and two thousand
and one were called the selex, the competitive local exchange carriers.
So you did have a lot of these sort of
local players building, laying down their own copper wires, and
(43:51):
they all sort of got washed out when the Internet
bubble burst and the revenues didn't materialize.
Speaker 4 (43:56):
You know.
Speaker 3 (43:56):
I think another thing is like there's just objectively going
to be a lot of demand for data. Clearly there's
nothing on the horizon, even setting aside AI specifically, And
in our recent episode, the Jigger made this point like,
even sitting aside the ambiguity about AI revenue, like data
center demand only seems to be going up. So there's
(44:18):
probably two Rob's point, A lot of investment that you
could feel reasonably secure is not just going to be
empty shelves or semiconductors that sit idle.
Speaker 2 (44:30):
Joe, we should do an episode where you just talk
about the early two thousand yeah, telecitation.
Speaker 3 (44:35):
Actually we should do a c lex episode. I do
think that would be useful. Let's find that's a great idea.
I think we should find someone because I do think
that's the most analogous story that everyone is a little
anxious about, which is and Ron got into broadband and
Tycho gotten was really big into broadband and all these
big players. Then it busted. So why did it bust
(44:55):
even though internet demand never really stopped slowing down? Is
kind of an interesting question.
Speaker 2 (45:00):
Yeah, and you're absolutely right that was a big story
in the credit market too. Yeah, that was one of
the last big pullbacks in the credit market, was like
two thousand and one.
Speaker 3 (45:09):
Eric, Okay, we got to get on this. Yeh would
be a really good telecom analyst from two thousand and one.
I'll try to think of.
Speaker 2 (45:13):
Some All right, we're back to journalism in real time
and generating new podcast ideas. All right, shall we leave
it there for now?
Speaker 3 (45:20):
Let's leave it there.
Speaker 2 (45:21):
This has been another episode of the aud Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy.
Speaker 3 (45:27):
Alloway and I'm Jill Wisenthal. You can follow me at
the Stalwart. Follow our producers Carmen Rodriguez at Carmen Erman,
Dashel Bennett at dashbot and Keil Brooks at Kelbrooks. Thank
you to our producer Moses on Them. For our odd
Lots content, go to Bloomberg dot com slash odd Lots.
We have transcripts of blog and a newsletter. You can
chat about all of these topics twenty four to seven
(45:47):
with fellow listeners in our discord Discord dot gg slash.
Speaker 2 (45:51):
Od lots And if you enjoy add Lots, if you
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(46:11):
the Bloomberg channel on Apple Podcasts and follow the instructions there.
Thanks for listening.
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots Podcast.
I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Jill Wisenthal.
Speaker 2 (00:25):
Joe, do you remember those stories. I guess they were
a bigger deal earlier this year, but they're still kind
of out there, the stories about how the stock market
is all about the big tech companies.
Speaker 3 (00:36):
Yeah, absolutely so, I mean, yeah, it still is.
Speaker 4 (00:39):
It still is.
Speaker 2 (00:40):
But I think like at one point earlier this year,
there was a number that caught my eye. I think
it was like thirty percent of the S and P
five hundred came from the mag seven. So, you know,
off of that, Microsoft, Nvidia and all of those. And
I guess as all the hype and interest over AI
has grown, the import of tech companies in the equity
(01:02):
market has increased in size along.
Speaker 3 (01:04):
With it totally. You know, anything is an interesting stet.
We're recording this on September twenty fifth. If I look
at the major stock in the seas for the year,
the NAS deck or as we used to write the
tech having NAZ deck is up twenty eight point three.
The S and P five hundred is up twenty point
three five percent, virtually the same. So I think it's
telling the degree to which the S and P is
(01:27):
becoming the nas Deck in fact that we should that
would be a good story or great headline.
Speaker 1 (01:32):
Yeah.
Speaker 3 (01:32):
Basically, the S and P, by virtue of the dominance
of these handful of megacap tech companies that dominate both index,
the S and P five hundred is morphing into the Nasdaq.
Speaker 2 (01:42):
Listeners, you get to witness how journalism happens in real time.
You come up with Heplin, you.
Speaker 3 (01:47):
Notice some numbers, and you're like, oh, let's see if
we could back a story into that.
Speaker 2 (01:50):
Okay, Well, speaking of everything becoming tech, I realized that, like,
one thing we haven't really spoken that much about is
what tech and all the recent enthusiasm for it actually
means for the credit market, for the world of corporate bonds.
Speaker 3 (02:05):
Yeah, this is interesting, and there's probably a reason that
we don't think about this very often, which is one
is that if you look at like the really big
tech companies and even like small companies, you know, a
lot of it has not historically been credit funded. A
lot of it has been equity funded, and VC is equity,
and you know, these companies produce so much cash from
(02:26):
their earnings, and they can fund themselves out of earnings.
That credit to some extent hasn't been part of the story.
But a few things a you know, some of these
companies mature and they start to issue debt, and they
do have debt, and some of it's to fund buybacks.
We're also in a period where a lot of tech
is more capital intensive than it had been in the past,
and sort of project based financing is more of an issue.
(02:47):
And maybe that's like it sort of you know, some
of the data center plays, et cetera. So I believe
there are interesting credit stories that, for reasons I can understand,
have not gotten much attention.
Speaker 2 (02:57):
There definitely are interesting credit stories, and I am very
pleased to say we have the perfect guests today who
is going to tell them. We are speaking with Rob Bittencore.
He is a partner at Apollo. He is the co
head of Opportunistic Credit. He's also a member of a
bunch of different investment committees over there. Rob, thank you
so much for coming on all thoughts.
Speaker 4 (03:17):
Tracy, Joe very excited to be here, longtime listener, and.
Speaker 2 (03:20):
Fan ah right, thank you. So let me ask the
basic question, but what does the co head of Opportunistic
Credit at Apollo actually do? Opportunistic credit sounds like you know,
something you might get at college. What is it exactly?
Speaker 4 (03:36):
So before I describe what I do within opportunistic credit,
I think it makes sense just a level set. Where
does that sit within the broader appall uplat platform. So
you know, Apaulo is an alternative asset manager and a
retirement services business. It manages about seven hundred billion dollars
of AUM, five hundred of which sits in our credit business.
And I focus on the opportunistic pool of capital, which
(03:59):
is about thirty billion dollars. So what is opportunistic It
is not as bad as you make it sound. It
is really credit investments on both public and private side,
targeting returns of eight to thirteen percent broadly speaking. So
in terms of what I do within that business, I
co lead a group of twenty analysts who are sector
(04:22):
focused and really are tasked with identifying, sourcing, and underwriting,
you know, the ultimate investments that go into a series
of funds that make that thirty billion dollar AUM pool
of capital that I mentioned.
Speaker 3 (04:34):
So it seems like you know I mentioned that, you
know you do have debt issued by tech companies, and
sometimes they run across the headlines. Sometimes you read like, oh,
Apple is selling a bomb yourself to sure these do
not sound like exciting areas for opportunistic credit at that
level because they're pretty close to like triple a rate,
Like if I'm lending to Apple, it's like the next
(04:55):
closest thing to probably lending to the US government in
terms of the spreads and.
Speaker 4 (04:59):
Stuff like that.
Speaker 3 (05:00):
So when you talk about like opportunistic credit and the
opportunity to actually get those like substantial return as you said,
eight and thirteen percent, are where are we typically looking.
Speaker 4 (05:11):
When I joined aupoll on two thousand and six, high
yield and the lever loan market were not synonymous with technology.
People thought of those as ways for slower growing companies
to finance themselves, companies that produce consistent, dependable cash flows.
Fast growing companies typically didn't look to the sub investment
(05:31):
grade market for financing. But that's steadily changed over time.
So if you look at a lot of the private
equity activity, which is a huge source of credit that
goes into the hy old market, about twenty five percent
of LBO activity today is in that technology space, and
that's steadily increased over the past ten or fifteen years.
(05:51):
It was about twenty percent before the pandemic. So that's
mostly been in software related names.
Speaker 3 (05:56):
Yeah, right, So there are various p firms that are
buying these of middle markets type software company.
Speaker 4 (06:02):
Or even larger multi billion dollar companies increasingly, so the
scale is certainly there. Today, about fifteen percent of the
levered loan market is software related. There's less of an
exposure in the higal bond market about five percent is
technology related. But I do think you have that critical
mass of technology names in both markets today. Obviously not
(06:23):
as intense as you see in the equity markets, but
it's definitely a market that's become more tech focused during
my career a topolla.
Speaker 2 (06:31):
So what does that mean for the things that Apollo
specifically is buying. The growth of the private market, the
rush of private equity money as well, does that translate
into specific things that you're doing, such as direct lending?
Speaker 4 (06:46):
Sure? So, a lot of what we've been talking about
right now is with respect to below investment grade, and
you talked about the fact that the larger hyperscalers have
largely self financed themselves or have gone to the public
ig bond markets. I think some of the more recent
technology themes that we've seen, namely AI, which I know
(07:07):
something you all have spoken extensively about. I think what's
interesting about this trend relative to maybe more recent technology
trends like smartphones and mobile computing, which was relatively asset light, right,
it was developing applications that sat on top of Android
and iOS, which didn't really require a lot of capital. AI,
(07:28):
which I think you referenced before, is very capital intensive.
You need to build the data centers, you need to
build the power to support those data centers, you need
to build the chip making facilities, to build the GPUs
which are used in the data centers, and that is
all going to require capital. A lot of that capital
is not going to be provided by the high yield markets.
Where it will be provided, in our view, is from
(07:49):
the private investment grade market, which you know, when people
think of private credit, they don't necessarily equate it with
investment grade. But as an institution, over half our credit
AUM is associated with our retirement services business, a theme
which invests primarily in long duration investment grade credit, and
(08:11):
so I think there's a huge opportunity for Apollo and
others to invest those pools of capital that are looking
for long data investments, high quality behind some of these themes,
and I can go into more detail around that if
that's helpful in terms of some of the areas we've
been focused.
Speaker 2 (08:27):
I have one question just before you do that. But
if I'm an investment grade issuer, certainly, if I'm an
Apple or someone like that, why would I want to
go into the private market to begin with? I'm IG,
I can sort of, you know, dictate my own terms. Presumably,
why would I even go down that route?
Speaker 4 (08:45):
Yeah, I mean, Apple's a tough one, just because it's
probably one of the highest rated companies in the world
and one of the most problems take an average, average
IG company. I think there's a couple of reasons. One is,
some companies want a diversity of financial sources, right, They
want toinance themselves both in the private markets and the
public markets, and so having access to multiple avenues of
(09:05):
capital is just good risk management. I think specific to
some of the themes we're talking about, and some of
this project based financing, it's complicated, right. The underwrights they
take a long time, they take detailed diligence. Oftentimes, when
we're looking at these sorts of opportunities, we're bringing in
third parties to help us analyze the situation domain experts.
(09:28):
So that's really hard to do on a syndicated basis.
You know, the investment grade public bond market prices on
a daily basis, right, it's called a drive by a
company will come in, hit the market, move on. For
some of this project based financing, that speed doesn't really translate,
and it really requires bilateral negotiation and partnership to ultimately
(09:48):
structure these deals which have more complexity than your regular
way publicly traded bond.
Speaker 3 (09:54):
Before we talk about some of these project based deals
or these CAPEX heavy AI related things, just going back
to you know, you mentioned in the mid two thousands
the sort of rise of PEBAC purchases. How much of
that market emerged as a function of software as a service,
specifically paying for software with subscription revenue. You have something
(10:17):
maybe like you know, something that does dental billing. You
get it an eighty percent of dentist office and then
it's like, okay, it would take a lot for this
piece of software to ever get uprooted, and so let's
just lever it up, put a lot of credit onto it,
and then you have this fairly predictable revenue stream for
years and years.
Speaker 4 (10:35):
Okay, I think software as a service has smoothed out
cashflow profiles. It's made those cash flow profiles more predictable,
which credit investors like. And it's a relatively capital hite model.
There's not a lot of capex associated with these businesses.
And as you mentioned, you know, many of these software
applications are very much embedded in the workflows of enterprise.
(11:00):
Isn't very hard to switch out, which is why you
have very high retention in a lot of that market.
So I think that's certainly one of the reasons why
that sector has gained so much popularity amongst some private
equity firms.
Speaker 2 (11:10):
Okay, so we sort of outlined the growth of SaaS
in credit markets, but talk to us about the growth
of I guess ai related tech in the current credit market.
What impact is that actually having.
Speaker 4 (11:24):
Within below investment grade few and far between. Recently, we've
seen some excitement around increased bandwidth needs for data centers,
so connecting the data centers that are being built. So
there's a couple of companies that operate enterprise fiber optic
networks that have benefited and that have announced some partnerships
with some of the hyperscalers. So I think that's a
(11:46):
tangible example of some of this infrastructure build out infiltrating
the high old markets. I think beyond that, it's really
been more angst inducing, honestly, with a lot of investors
trying to figure out, you know, are there going to
be losers?
Speaker 5 (12:00):
Right as this technology the disruption story exactly right, and
I still think we're in the first or second ending
with respect to determining who the losers are going to
be from this technology.
Speaker 4 (12:15):
There were some announcements earlier this year around Klarna, which
was using AI chatbots for some of the customer service needs,
which created some volatility and some of the call center operators.
So I think that would be an example of a
sector that has felt some impacts from AI, but for
(12:35):
the most part it's been somewhat limited.
Speaker 2 (12:52):
Joe, this reminds me of one of the fundamental realities
of credit investing, which I think came up in a
recent episode with Oak Tree's Danielle Paul. But really a
lot of it is about trying to avoid the losers.
Speaker 3 (13:04):
Our brains went to the same place, right, So when
you're picking a tech stock, you want to pick the winners,
and when you're lending their companies, you want to avoid
the losers. Which sort of brings me to exactly what
I was going to ask you, which is like all
credit investing, but all investing is going to have some
sort of like you look at the balance sheet, you
look at the cash flows, you look at the metrics,
and then some subject matter domain expertise.
Speaker 4 (13:26):
And again, if.
Speaker 3 (13:26):
You're picking stocks, you're like, no, this is the company
whose chip is going to be the winner. This is
the company whose liquid cooling system for data centers is
going to be the winner. Is the nature of sectoral
analysis from a credit perspective a little different because it's
about loser avoidance.
Speaker 4 (13:44):
So certainly there is less asymmetry just mathematically in bond
investing or in credit investing, right, your upside is capped.
It's not necessarily capped at par. By the way, depending
on the call schedule of a bond, bonds can trade
over par. You don't have the asymmetry that you have
in the equity markets. So through that lens, I do
(14:05):
think there's more of a downside protected mindset that credit
investors bring to bear. I think you touched upon understanding
the major trends and themes in a sector. That's something
we spend a lot of time thinking through because of
that risk that technology can potentially play from a disruption perspective. Right,
(14:26):
you know, what are the major themes around technology in
the market today and how is that going to influence
individual sectors? And that gives you a little bit of
a guidepost in terms of maybe not what sectors to
entirely avoid, but where to be very careful as you're making,
you know, analyzing the opportunities in a particular sector. You
(14:46):
see that dispersion very much in the market today, right.
If you look at the high market, which is trading
about three hundred basis points from a credit spread perspective,
and you look at the sectors that have the high
proportion with spreads above a thousand basis points, it's cable satellite,
(15:06):
it's telecom, and it's broadcast TV. And in some instances
you see those heightened credit spreads because there's too much
leverage on individual companies. But I would suggest that there's
clearly something sectorial going on in those sectors. That's creating
some headwinds, which is leading to those elevated spreads.
Speaker 2 (15:26):
So, speaking of losers and disruption, could you maybe walk
us through a specific example of like, suddenly there's this
new thing and it impacts a different credit. Are there
specific instances that you've observed?
Speaker 4 (15:39):
Sure? So a recent example would be the satellite industry. Yeah,
say more about that, right switch company. Oh in starlink
impact right elon musks. It's a subsidious SpaceX. Starlink operates
the largest low Earth or a bit constellation of satellites,
providing broadband at higher bandwidth than legacy technology with lower latency.
(16:03):
Incredibly disruptive to some of the existing satellite communications providers.
Speaker 3 (16:08):
Well, it's a name of one. I'm going to pull
up a ticker.
Speaker 4 (16:09):
On my terminal. SEES is one of the largest names
in the space. They recently merged with Intelsat okay, thank you.
And there's a group of about five or six of
those players within that sector. And so that's a very
tangible example of a new entrant with a new technology
that has advantages relative to the existing technology, which has
(16:32):
created some headwinds in the broader space. Now, I do
think the industry, and this is a trend that we
tend to see oftentimes, when new technologies disrupt a sector,
you actually do see more consolidation because it's a way
for the industry to adapt effectively by getting larger cutting
(16:55):
costs and then hopefully figuring out a way to better
compete against the new entrant market.
Speaker 2 (17:00):
You kind of anticipated my next question there, but what
happens to pricing in these scenarios and how quickly do
existential threats to a business model get priced into a
company's corporate bonds or loans or whatever they might have outstanding.
Because I feel like, on the one hand, if you're
getting a major competitor in the form of Elon, Musk
(17:22):
and Starlink, that's bad. But on the other hand, credit
markets are notoriously slow compared to stock markets, and on
the other side, it can spark defensive measures, consolidation or
cost saving, which would be very, very valuable if you're
a lender to this company.
Speaker 4 (17:43):
I think the market reaction time has increased over the
last five years, and I think the reason is the
first widespread example of disruption in the credit markets was
retail and everybody knows it, Amazon e commerce its pretty
sure store all of that dead malls, and I think
(18:05):
that played out from sort of maybe twenty twelve to
twenty eighteen. You had a spate of bankruptcies and retail failures,
and I think the market realized that, you know, it's
hard to necessarily fight against a secular trend that powerful,
so we better start paying attention to it. Interestingly, I
(18:25):
would argue sometimes the market overreacts right and so counterintuitively
it could create interesting long opportunities. A great example, in
our opinion is the cable industry. So cable industry did
very well during the pandemic for obvious reasons. There's been
some normalization post pandemic that's impacted their business. But from
a secular perspective, the industry's face competition from a lot
(18:48):
of the old line telecom companies starting to build out fiber,
which has created more competition. You've also seen the likes
of Verizon and T Mobile offer home broadband over the airwaves. That,
on the margin, I think has created this narrative disruption
within the cable space, which has created quite a bit
of volatility within the capital structures. We still like the
cable space. We still think it has a lot of
(19:10):
really attractive attributes. It's typically duopoly market in each region
produces stable, consistent cash flow in the hierarchy of needs.
You know, it's sort of air, water, food, cable, cable, broadband,
and so we use that as an opportunity to lean
into the industry over the past you know, eighteen months.
So it's not all bad news, per se. I do
(19:32):
think sometimes the market tends to overreact or maybe act
too soon, right, Sometimes these trends do take quite a
bit of time to play out.
Speaker 3 (19:41):
No, I mean this makes a lot of sense. Like
we can all look at say like, oh, you know
what Elon Musk is putting satellites into space. This is
going to allow me to cut the cord at home,
et cetera. Well, we're probably overestimating when I just tell
that story the speed at which I'm going to do that.
And I guess, like, just internally, maybe there's a better
solution for me, But it would take me a while
(20:02):
to get comfortable with the idea of just like cutting
off my broadband internet excess in their apartment.
Speaker 4 (20:07):
Inertia is a very pet can be a very powerful force.
Speaker 3 (20:10):
I pay for a lot of things. Tracy and I
just like, I don't know why, and then I get
a bill and it's like some app I downloaded three
years ago, And.
Speaker 2 (20:17):
Yes, there is that annoyance.
Speaker 4 (20:19):
Okay.
Speaker 2 (20:19):
So, speaking of other things that have happened in recent years,
a big one has to be the influx of government
money into tech related areas, so data centers, also clean
energy technology, things like that. One thing we often hear
when it comes to fiscal spending is the idea of
crowding out the private market. And I'm curious, as someone
(20:42):
who sits at Apollo and is basically in charge of
directing a bunch of private capital, is that something you
notice or worry about at all.
Speaker 4 (20:52):
We haven't seen any signs of that at this point,
but certainly the fiscal situation from a macroeconomic perspective is
something that at a high level we're constantly watching. Clearly,
I think the budget deficits at two trillion dollars, which
would seem to be unsustainable if it continues, you know,
in perpetuity. But haven't really seen a crowding out effect
(21:14):
per se, you know. If anything, I think, you know,
some of the more recent government programs that have targeted
investment in specific sectors that are deemed to be strategic
has been a positive development in terms of attracting crowding
in crowding in almost attracting private capital alongside you know,
(21:36):
the government investment. So you know, whether it's the Chip Act,
which allocated fifty billion dollars to construction of the domestic
semiconductor supply chain, I think that certainly had a positive impact.
You have the Bead Act, which is looking to extend
broadband in rural communities. I think you've seen a lot
of cable providers and other telecom providers talk about the
(21:59):
opportunity there to to potentially utilize that. And then obviously
the Inflation and Reduction Act has clearly focused resources on,
you know, the build out of the clean energy infrastructure,
and I think those aligned very much with some of
the major themes in the economy and the infrastructure needs
in the US, and so as a firm, you know,
(22:19):
we're very much focusing on those sectors. With respect to semiconductors,
we talked a little bit about it, but you know,
recently we announced eleven billion dollar joint venture with Intel
around one of their leading edge or their leading edge
facility and Ireland, which you know, I think is part
of that major trend of bringing back or making sure
(22:41):
that we have you know, stable, secure supply chains for
critical industries like semiconductors.
Speaker 3 (22:46):
Going back to satellites for a second, if a legacy
satellite issue and we're not going to name any names,
go bankrupt or something like that. You know, obviously, as
credit investors, you think about collateral and there are obviously
assets that a satellite provider would have. However, if a
satellite provider were to go bankrupt, it might be because
(23:07):
those satellites just aren't competitive anymore or whatever. How do
you think about the value of assets that you could
seize in a bankruptcy when there is a question that
the reason that the company went down is because that
technology is no longer competitive.
Speaker 4 (23:22):
So in a vacuum, it's it's hard to answer that question,
just you know, because it's so fact specific and situational.
Speaker 3 (23:28):
So talk to us about how you might Right.
Speaker 4 (23:30):
So Intel sat did go backrupt.
Speaker 3 (23:32):
Oh yeah, all right, Risco, let's talk about that.
Speaker 4 (23:34):
But it was a little bit of a different situation
given they had quite a bit of wireless spectrum that
was in the process of being repurposed to support wireless Networks,
which was a huge asset for the estate that ultimately
you know, helped underpin the reorganization of that company, which
has been very successful by the way, as I mentioned before,
it's been acquired through a merger with SES. But we
(23:57):
generally try to avoid sort of secular loser, if you will,
because in my experience, predicting decline curves and businesses that
are facing significant headwinds and technological disruption can be really challenging.
If there is like true fundamental disruption versus angst inducing
headlines that might not answer your question directly. Generally we
(24:19):
want to avoid those sorts of situations if we are
in a position, you know, we are invested behind a
company that may face some of those challenges. Thinking more
broadly across the industry, as I mentioned before, disruption tends
to be a catalyst for consolidation. Thinking through the potential
value of those assets as part of another company can
(24:41):
be one way to frame, you know, downside valuation.
Speaker 2 (24:44):
In our experience, I'm going to jump to the polar
opposite of downside valuation and talk about upside valuation because
(25:07):
certainly in the stock market there is this ongoing discussion
about all the hype around AI and tech and whether
or not at an extreme level it might be a
bubble or at a minimum it is potentially overvalued. Do
you see that kind of angst in the credit market?
And I'm thinking specifically if you're talking about new technology,
(25:30):
often there's a lot of uncertainty embedded in these business models,
and you see a lot of CEOs talk about like
total market size, and maybe they start acquiring other companies
and they start doing things like ad backs which affect
their credit profile and things like that. But how are
you sort of separating reality from future value specific AI
(25:53):
or specific to tech. But we could definitely talk AI
would seem to be a prime example there.
Speaker 4 (26:00):
I think it's early. I think the quantum of investment
that is being allocated the associated infrastructure is unprecedented. There
are a lot of estimates, but broadly speaking, one gigawatt
of data center capacity costs about ten billion dollars to build.
(26:20):
I've seen estimates that AI is going to require over
one hundred gigawotts of capacity to be built.
Speaker 3 (26:27):
So is that a trillion it's trillion dollars.
Speaker 4 (26:29):
And that doesn't include the GPS that go into the
data center. Then you have to talk about the power
that's going to be needed to support these data centers.
A gigawot of natural gas power production cost a billion dollars,
a gigawot of solar production cost a billion dollars. The
last nuclear plant built in the United States was about
(26:50):
five gigawotts. It costs thirty five billion dollars. These are
huge numbers, and so that's real, right, Those dollars are
going to be spent. And I think the sponsors of
this technology, which are largely the hyperscalers, have very, very
very deep balance sheets, right, and so I think that
(27:12):
is going to give a durability to the trend and
instill a patience, if you will, versus other technology cycles
we've seen, which have been very dependent on the public markets,
the equity markets. You know, the Amazons and the Metas
and the Googles can afford to play, and the Microsofts
can afford to play the long game. So when will
(27:33):
this translate into tangible revenue? I don't have a strong
view on that, but I do think that the market
will be relatively patient. From that perspective.
Speaker 3 (27:43):
Let's talk more about this build out of data centers
than specifically one of the things that I've seen some
headlines about and I'm not entirely sure whether they're real.
It kind of seems like maybe it's being overegged a
little bit. GPU backed loans and some of the day
centers like, hey, you know what, Michael bust but then
you can have our Nvidia Blackwell chips something you do.
Speaker 4 (28:05):
Whatever?
Speaker 3 (28:06):
Is that real? Is that a thing that's going on?
Speaker 4 (28:08):
It absolutely is say more about that. I don't want
to name sort of company names because I don't know
it's been like publicly disclosed.
Speaker 3 (28:15):
We talked to the core weave cso for example, they're
a big player.
Speaker 4 (28:18):
In this, So we've looked at those opportunities before. I
understand the attractiveness of the opportunity. In many instances you
have high quality counterparties that are utilizing those GPUs. Yes,
I think is part of the credit support for those loans.
If you do believe that there is this really unprecedented
(28:39):
secular push to build out associated capacity that should be
supportive for the underlying value of these chips. The counterpoint
would be these are new markets. You know, people I
think don't really have a lot of empirical history to
point to in terms of determining what they may be
worth under various scenarios. So, but clearly there's going to
(29:01):
need to be a financing solution if all that data
center capacity does get built out, because you know the
numbers I mentioned, you know, trillion dollars, you know, multiply
that by one plus to determine what the associated costs
of the GPUs required in those data centers. And that's
not all going to be equity financed. So it wouldn't
(29:22):
surprise me to see that market grow further.
Speaker 2 (29:24):
So I'm old enough to remember when we have the
first securitization of solar panel leases. I think it was
by like Solar City or someone like that, and that
was that was such a novelty at the time, and
I'm pretty sure I wrote a story that was like
Sunshine backed bonds, hahaha. But in general, are you seeing
(29:44):
a resurgence in asset backed securities ABS for some of
these tech related investments just because of the scale of
the investment that's needed and maybe some of the interest
in collateralized lending.
Speaker 4 (30:00):
So there's definitely a developed market for data center backed
ABS issuance. It's a relatively small market, so it's clearly
going to have to grow if all this capacity does
in fact get built out. We have continued to see
innovation in the ABS space. I talked about the build
out of fiber that's occurred and some of the challenges
that's created for the cable industry. That is a market
(30:23):
that now is accessing the ABS market, where companies that
have built out residential fiber are taking those assets and
effectively dropping them into securitization vehicles and then raising capital
at attractive rates relative to what they could raise in
the public high you bond market. So the market is
very creative at meeting needs, and so I would suspect
(30:43):
that you're going to see over time more ABS type
structures in addition to the role private credits going to
play in financing these projects is part of the funding solution.
Speaker 3 (30:54):
By the time this episode comes out, we'll have recently
released an episode on Talk You a Lot about the
nuclear build out or this hope that many people have
for some sort of nuclear revival, and we recently had
the news of the Microsoft would committed to buy a
bunch of energy from Constellation to turn back on one of
the reactors at Three Mile Island and there is a
(31:16):
real like chicken and egg problem here because the nuclear
players need to have that guaranteed demand. And also it's
risky to build a new reactor because we've were out
of practice as you mentioned, and so forth. Is that
going to create any opportunities as you see it, like, okay,
if there is some momentum that gets going for some
of this like difficult construction projects, is that something that
(31:40):
you could see coming across your screen that space.
Speaker 4 (31:43):
Absolutely. I mean so a little bit out of my element.
Not a nuclear power expert, so I don't want to misspeak,
but I think the consensus is it's unlikely that in
the near to medium term you're going to see the
construction of a large scale nuclear plant here in the
United States. I do believe that there's opportunities to increase
(32:04):
the capacity at existing facilities as well as restart brown
field facilities. So I think that's clearly going to be
part of the solution. But to the extent a market
does develop for green field nuclear projects in the US,
(32:24):
the cash flow profiles the long duration nature of these assets.
The size of the investment opportunity fits in very nicely
with the pools of capital that we manage primarily within
our retirement services business.
Speaker 3 (32:38):
But one of the things they've in energy is that
in certain areas there is a need for project based finance,
but the market doesn't exist. So another thing we talked
about recently on a show is a geothermal for example
in these projects, which is sounds very good in theory,
but I don't know, there's a lot of money. What
does it take for a new market to build? Because
it seems like a chicken and an egg problem to
(32:59):
some extent, which is that, Okay, you don't you know,
here's a new idea. We're going to like put a
bunch of pipes in the ground and get heat out
of the earth and that's going to create all this power.
But it's novel, and it seems a little bit untested
and it's immature. But in theory it could produce stable
cash flows, and you know, there's some reason to think
just like maybe talk us through like if there's a
(33:19):
market that doesn't exist yet in real scale, but there's
reason to think it could. Like what is the process
by which the credit markets could agglomerate onto a new area?
Speaker 4 (33:30):
So I'm speaking generically, yeah, Geneeric, Yeah, totally, Geothermal so
in some instances, the government is sort of the entity
that's priming the pump. Right, So you mentioned geothermo I
assume you're your referencing geothermal the utility.
Speaker 3 (33:43):
Scales, Yeah, utility scale.
Speaker 4 (33:47):
But if you look at the IRA, yeah, you know,
one of one of the provisions provides you know, tax
credits for you know, the build out of geothermo oh
kind the residential process. So and that's example of how
the government can play a role too. You sort of
fan the flames of a new technology. In terms of
the role the credit markets has to play, the reality
(34:07):
is if the technology isn't commercialized, it's you need to
go to the equity markets first, right, Like it doesn't
really necessarily fit the return profile or the downside protection.
I should say that that a credit investor is typically
looking for, so you know, typically the migration as you
start in the equity markets, you commercialize, generate free cash flow,
and then go from there and start accessing the credit markets.
Speaker 2 (34:30):
Going back to nuclear for a second, One other thing
that happened recently in addition to the announcement about three
Mile Island is there was an announcement from a bunch
of pretty prominent banks saying that basically they were really
into nuclear power now and they would throw their weight
behind it. And setting that specific sector aside. I'm curious
(34:53):
how much competition you see from banks in the overall
credit market and how that might have changed changed in
recent years.
Speaker 4 (35:02):
Absolutely so clearly the trend of you know, more lending
activity moving out of the banking system into other sources
of capital. We're talking about it now, but the reality
is in our our chief economist, Tourist and Slock had
a great graph which basically it showed the percentage of
non financial lending that resided in banks, and it hit
(35:24):
its peak in nineteen seventy five at fifty So fifty
percent of the non financial lending in the US economy
was done by banks. Two thousand and seven was thirty percent,
twenty percent today. The point is, this is a trend
that's been going on for fifty years, so long before
Dodd Frank, Long before Dodd Frank and all the financial
innovation you mentioned securitization. That's one technology or financial technology
(35:47):
that moved risk off bank balance sheets. The creation of
the leverage loan market in the early two thousands and
the late nineties. Another mechanism that moved risk off of
bank balance sheets into investors' hands. And I think private
credit is just another arrow in the quiver that is
supporting that trend. Now more recently recently defined as POSTGFC.
(36:11):
You've had changes in regulation which clearly have accelerated that
move and have forced banks to de emphasize certain behaviors.
So banks are still going to be an important part
of the extension of credit in the United States beyond
like the investment horizon and reasonable investment horizon that we
can talk about, and so I think private credit is
(36:33):
just one more tool or mechanism that allows for that
diversification of the provisioning of credit outside of the banking system. So,
you know, banks are oftentimes partners, not competitors in a
lot of situations because they have corporate relationship, but they
don't have the appropriate capital to meet the needs of
(36:54):
that corporation. So we can actually partner together and provide
the capital, they provide the relation, and you know, both
sides are benefiting as a result.
Speaker 2 (37:03):
Speaking of relationships, so this was something else that I
really wanted to talk to you about. You're the head
of Opportunistic Credit. How do potential opportunities actually land on
your desk. Is it like a company or a bank
would come to you with a specific need or suggestion,
or is it your team of analysts who are you
looking at outstanding issuance at the moment and like finding
(37:26):
things they think are maybe mispriced or where there are
arbitrage opportunities or that sort of thing.
Speaker 4 (37:31):
All of the above. So, as I mentioned, I work
with a team of about twenty investment analysts. We've never
quantified exactly where the ideas come from, but I would
say fifty to sixty percent is being sourced by the analysts.
As I mentioned before, sector focused. So really what that
means is they're tasks with knowing everything about three or
(37:53):
four sectors, knowing the management teams and the companies in
those sectors, knowing the major trends in those sectors, and
through that process they're just naturally going to identify interesting
opportunities on both the private and the public side. In
addition to that, myself, some of the other credit partners,
our trading team, which is constantly interfacing with a seal side,
(38:14):
is serving the broader market to try to identify opportunities.
And then I think something that's somewhat unique to Apollo.
We have a very collaborative approach across our different businesses.
We have a large credit business, we have a large
equity business, we have a large hybrid business. So those
teams work very closely to share ideas because we've had
(38:35):
many situations where a company will come with an ask
from our a hybrid team about some sort of preferred
stock investment. You know, they want some sort of preferred investment.
The numbers don't quite work for either the company or
for us, but perhaps a secured credit and instrument does
(38:56):
work for both, at which point you know, the opportunity
will transition in into my team. So the goal is
to make the top of the funnel as wide as possible,
So we're looking as many opportunities as possible. You know.
I like to use the sort of metaphor that we're
panting for gold, right, so when you're painting for gold,
you want as much soil, if you will, in the
pan to find those top opportunities.
Speaker 3 (39:17):
Very minor thing, but just an interesting you know. And
when I hear the word analyst in my head, I
just think of someone who's like looking at spreadsheets and
tweaking numbers. And seeing how different prices at the end
of the spreadsheet change with different assumptions. But part of
the job at an analyst at an established institution like
Apollo is also on the sourcing side and getting to
(39:40):
know these companies and that when one of these companies
needs financing for whatever reason, they have built that relationship.
Speaker 4 (39:46):
Absolutely interesting, which is why regardless of where AI goes,
it will never fully disrupt, you know, the financial analyst
industry because it very much is a process an art,
it is art science. I think it's a little bit
of both. That involves just you know, building human relationships
(40:07):
with you know, with management teams, with experts in the industry,
with the cell side, with the banks, with our peers
on the buy side, so critical part and it's also
one of the interesting things that I've noticed. And I
started as an analyst, so I you know, that was
my first job from two thousand and six to like
(40:27):
twenty fourteen, and then I started doing other stuff. When
I started, it was very much you listen to the
conference call, download the ten K and ten Q and
it's amazing how much more information is available today and
it's not necessarily from the sources that you'd expect there. Obviously,
(40:48):
you know, there's there's industry research that you can access,
there's expert networks that allow you to talk to experts
in a specific industry. But it's even broader than that.
It's sometimes you get domain experts to write a really
interesting blog on a specific sector. Podcasts, you know, not.
Speaker 2 (41:05):
To you know, go ahead, and that's fine.
Speaker 4 (41:09):
Podcasts are actually an amazing way to learn about a sector.
Right just go to Spotify or whatever your platform is,
you know, search for a subject and you can hear
forty minutes from a domain expert YouTube. Even so, the
amount of information that's available has only expanded. It's sometimes overwhelming,
but I guess the point I'm trying to make is
beyond developing those personal relationships with key operators in a sector,
(41:34):
it's also just expanding, you know, the sorts of information
that you're intaking, because it's certainly it's amazing how much
more information is available than than when I started.
Speaker 2 (41:44):
Well, on that note, subscribe to all thoughts everybody. No, Rob,
that was fantastic, Thank you so much for coming on
the show. Really appreciate it, my pleasure.
Speaker 4 (41:53):
Really enjoyed the conversation. Joe.
Speaker 2 (42:08):
I'm really glad we did that episode because again, so
much of the focus is on what tech means for
the equity market. It was really good to get a
different perspective. And as you said, like instead of identifying
the winners, the focus is very much on identifying the losers.
So that was interesting. One thing that also struck me
when Rob was talking about the scale of the capital
(42:30):
investment needed and how that fit into the discussion over
hype and future revenue street, it does sound like, dare
I say it, maybe things are a little bit different
this time, just because, as he was pointing out, the
size of the dollar amount that's needed is so huge
(42:51):
that you might not get this massive influx of players
into the market because like the starting point for all
of this is so high. So I wonder if there's
like maybe more of a moat around the business than
there was when it comes to for instance, software.
Speaker 3 (43:09):
Well, I mean the analogy where you'd reach back to,
I think is the telecom build out in nineteen ninety
eight to two thousand and two, and there you had
this huge over investment in cable or various versions of
cable copper specifically as they called it back then, and
there was a massive over investment and a bunch of
stuff in bankrupt and then we all sort of know.
(43:29):
I forgot about several years. But it's interesting that you
bring up the scale requirement because the entities that really
got hit hard in like two thousand and two thousand
and one were called the selex, the competitive local exchange carriers.
So you did have a lot of these sort of
local players building, laying down their own copper wires, and
(43:51):
they all sort of got washed out when the Internet
bubble burst and the revenues didn't materialize.
Speaker 4 (43:56):
You know.
Speaker 3 (43:56):
I think another thing is like there's just objectively going
to be a lot of demand for data. Clearly there's
nothing on the horizon, even setting aside AI specifically, And
in our recent episode, the Jigger made this point like,
even sitting aside the ambiguity about AI revenue, like data
center demand only seems to be going up. So there's
(44:18):
probably two Rob's point, A lot of investment that you
could feel reasonably secure is not just going to be
empty shelves or semiconductors that sit idle.
Speaker 2 (44:30):
Joe, we should do an episode where you just talk
about the early two thousand yeah, telecitation.
Speaker 3 (44:35):
Actually we should do a c lex episode. I do
think that would be useful. Let's find that's a great idea.
I think we should find someone because I do think
that's the most analogous story that everyone is a little
anxious about, which is and Ron got into broadband and
Tycho gotten was really big into broadband and all these
big players. Then it busted. So why did it bust
(44:55):
even though internet demand never really stopped slowing down? Is
kind of an interesting question.
Speaker 2 (45:00):
Yeah, and you're absolutely right that was a big story
in the credit market too. Yeah, that was one of
the last big pullbacks in the credit market, was like
two thousand and one.
Speaker 3 (45:09):
Eric, Okay, we got to get on this. Yeh would
be a really good telecom analyst from two thousand and one.
I'll try to think of.
Speaker 2 (45:13):
Some All right, we're back to journalism in real time
and generating new podcast ideas. All right, shall we leave
it there for now?
Speaker 3 (45:20):
Let's leave it there.
Speaker 2 (45:21):
This has been another episode of the aud Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy.
Speaker 3 (45:27):
Alloway and I'm Jill Wisenthal. You can follow me at
the Stalwart. Follow our producers Carmen Rodriguez at Carmen Erman,
Dashel Bennett at dashbot and Keil Brooks at Kelbrooks. Thank
you to our producer Moses on Them. For our odd
Lots content, go to Bloomberg dot com slash odd Lots.
We have transcripts of blog and a newsletter. You can
chat about all of these topics twenty four to seven
(45:47):
with fellow listeners in our discord Discord dot gg slash.
Speaker 2 (45:51):
Od lots And if you enjoy add Lots, if you
want us to do that episode on the early two
thousands analogy, then please give us a positive review on
your favorite podcast platform. And remember, if you are a
Bloomberg subscriber, you can listen to all of our episodes
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(46:11):
the Bloomberg channel on Apple Podcasts and follow the instructions there.
Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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