December 19, 2024 • 48 mins
Private credit could become a $40 trillion market in five years, according to Apollo Global Management. “We’re going to get there really soon,” Akila Grewal, the firm’s global head of credit product, tells Bloomberg News’ James Crombie and Bloomberg Intelligence analyst Matt Geudtner in the latest Credit Edge podcast. Currently, “we estimate it’s a $20 trillion market,” she adds, referring to asset-based finance. Grewal and Geudtner also discuss relative risk and returns between public and private markets, retail investment, real estate opportunities, advantages for borrowers to raising capital privately and the fundraising environment.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Aquila Graywall, global
head of credit product at Apollo. How are you, Aequila,
I'm great.
Speaker 2 (00:29):
Thank you so much for having me, James.
Speaker 1 (00:30):
Thank you so much for joining us. So we're very
excited to get your credit market views, and also delighted
to welcome back Matt Goitner with Bloomberg Intelligence. Hello Matt
Way everyone. So just to set the scene a bit
here at the top, US markets are rallying as rates
come down, the economy keeps chugging along, and investors look
forward to a new US administration, which the bulls think
will be very pro growth, pro markets. Credit markets are
(00:51):
on fire. There's a ton of demand for yield, and
we've seen a huge amount of borrowing by companies, with
a lot more to come in twenty twenty five. Private
debt in particular has experience of meteoric rise. It's now
a one point six trillion dollar market, but it could
well be worth tens of trillions of dollars more when
you wrap in all the potential asset based finance. Forty
trillion is the number we're going to talk about today,
(01:12):
almost as big as the S and P five hundred.
So we potentially have very rapid market expansion, tight bond spreads,
and ever increasing demand. But that doesn't all mean zero risk.
The Fed's cutting rates, but treasury yields are stuck above
four percent, and the stated aims of the next government
all sound very inflationary, signaling a period of higher for longer.
(01:33):
That means elevated debt costs, which will hurt borrowers across
the board, especially the weaker ones. We're already seeing more
defaults and bankruptcies in private markets. There's more amending and
extending of loans, while some lenders are having to get
repaid with more debt the so called payin kind deals,
which aren't always good good for the market. In the background,
we have a lot of geopolitical risk, which will only
(01:55):
be amplified by the Trump trade wars. Plus the threat
of US recession hasn't gone away. A downturn would cause
more distress in credit markets. So Akila, where do we
go from here? Is credit still a great place to
be in twenty twenty five?
Speaker 2 (02:09):
Well, listen.
Speaker 3 (02:10):
I think that those are really compelling and actually very
telling statistics that you that you work walk through. I
think for us, we absolutely believe that private credit and
credit is an enduring asset class for investors, and we
expect based on all the comments that you made, whether
it's higher for longer, a stronger economy, not without risks
that we can talk about, but having credit exposure in
(02:32):
your portfolio really will allow investors to capitalize on higher
yielding assets in a safe way for over the long term.
Speaker 1 (02:40):
But why private markets, Why is that all the rage suddenly?
And how do you come up with that forty trillion
dollar number. It's it's obviously much more than our other
guests expect. Some say more like thirty trillion, others say
closed to five trillion. So why so big?
Speaker 3 (02:52):
Yeah, so we've been saying forty trillion for a while,
and it's a good question. I think when you think
about the direct lending sub and grade, that one point
seven trillion dollar number is obviously very well quoted and
very well established. I think when we think about private markets,
we think it includes not just corporate credit below investment grade,
but also corporate credit that is investment grade. Which is
(03:14):
obviously a very sizable and large market in and of itself.
And then when you add in all the asset based
finance opportunities, including investment grade and non investment grade, that
is a very wide ecosystem. And we can talk about
asset base finances. As you well know, it touches every
single part of what we do as a consumer, as
a business, et cetera. And we think that that whole
(03:35):
market to collectively can get you to that forty trillion
dollar rough number.
Speaker 4 (03:39):
Yeah, thank you. So I'm part of the corporate credit bucket,
so I call it covered the industrial sector. So this
year we've seen issuance up twenty percent from last year,
but that total is just one hundred billion dollars relative
to forty trillions. So we're talking about a splinter of
opportunity in terms of the total addressable markets. So can
you kind of take a step back and maybe breakdown
(04:01):
or bucket at that forty trillion? Where does where does
corporate credit sit within that hierarchy? Is it twenty five percent,
is it fifty percent, is it ten percent? How does
that sort of flow up?
Speaker 3 (04:12):
Yeah, I think that we think of the asset base
finance world as roughly fifty to sixty percent let's just say,
of the of the forty trillion dollar number, and then
we have kind of the balance that will be across
corporate both in investment grade and not investment grade. And
obviously the sub ig corporate credit business and as a
category is probably in that kind of two trillion dollar number.
(04:33):
In the balance is private policements and other kind of
corporate investment grade type dead.
Speaker 1 (04:37):
And when you break down the opportunity, I mean there
are different parts of the pie. What do you think
are the biggest let's say three areas to hit for
next year?
Speaker 3 (04:46):
I think that for us, you know, we think that
there are a couple different things. I think we pardon
parcel of this entire discussion that you know, hopefully we'll
have today about private credit is the growth and expansion
of that market. And we, as you may have heard
or seen us, let's talk about we actually believe that
there's going to be continued convergence between what has historically
been public credit and private credit. And we expect that
(05:08):
convergence to continue. And so whether that gets anchored in
a forty trillion dollar number or a large one over time,
I think remains to be seen, but we think that,
you know, having a portfolio that both can invest in
public and private assets is really compelling. So, you know,
from our perspective, there's been a lot of kind of
discussion around public markets historically been really safe and private
(05:29):
markets deemed you know, quote unquote more risky, and that
could be because of illiquidity or perceived lack of transparency.
Our view is that, you know, everything is relative, but
private credit can actually be quite safe. And so in
terms of you know, three themes James to your point
that we think are going to continue to be pervasive
over the next year and beyond is kind of this
(05:50):
public and private market convergence. There is the accessing fixed
income replacement that's not just public credit but also in
private credit format. So when you think of about very
large institutions that have huge balance sheets that are really
looking at their fixing come portfolios as daily liquid product,
but they have twenty to thirty year you know, investment horizons,
(06:11):
pivoting a part of that portfolio to private assets actually
is very compelling but also prudent. And then the third
is you're seeing this now. I mean, we've been talking
about asset based it feels like a long time, but
equally not that long if you think about this year alone,
which we think that when you think about private credit
and direct lending, that has been the cornerstone of acid
allocations in private credit. But moving to asset based as
(06:34):
a diversifier in that portfolio is also a theme that
we think will continue.
Speaker 4 (06:37):
But if you're doing that, are you going down the
credit quality spectrum? Like what it's all investment grade? Or
for you guys, are you guys looking at exposure below
investment grade? Is how do you guys judge or measure
I guess risk adjusted returns? Like your definition is typically
like the sharp ratio of return of the private credit
(06:57):
portfolio less risk free over sigma for the portfolio, or
how are you guys measuring those risk adjusted returns?
Speaker 2 (07:05):
Yeah, I think it's a great question.
Speaker 3 (07:06):
So I think that there's obviously kind of sharp ratio
which is, as you defined, kind of per unit of
excess risk over risk free and volatility constituents as well.
I think that that is definitely a way and one
way that we look at it. So when you take
a step back, Apollo's business is a seven hundred and
thirty billion dollar business, of which you know nearly six
(07:27):
hundred billion dollars was within our credit business, of which
nearly three hundred billion dollars is from a theine in
our retirement service business. So a lot of what we
do when you think about safe yield and safe risk
is really because we have to manage on behalf of
our insurance balance sheets, which by definition need to be
in predominantly investment grade risk. And so we're invested in
(07:50):
very high quality, top of the capital structure, safe investment
grade type opportunities by virtue of one needing to from
a regulatory perspective, but also because we think that you
can get at outsize and excess return compared to a benchmark,
and so your point at is well taken, which is
at measuring excess return per unit of risk is obviously
one how you outperform visa V volatility in the broader market,
(08:13):
but also to how you outperform a relative to the
index that's taking similar risk. When you think about a
Pollo's credit business, we virtually have no second lean risk.
We focus on top of the capital structure first lean secured,
irrespective of investment grade or not. And so from our perspective,
we still think that you're able to create compelling risk
reward by attaching higher than the capitol structure.
Speaker 1 (08:36):
I'd get that from an investive perspective, and obviously we've
had a lot of investors talking about the opportunity from
that standpoint, but from a borrower's point of view, from
an issue, and I'd be interested in both of your views,
because you know, Matt, you cover this day and day out.
CFO is a very sensitive to the smallest change in
funding costs. Why should they do it this way? On
the Facebook it looks more expensive, so why would they
(08:57):
do it?
Speaker 3 (08:58):
I think it's a great question, and I'll talk about
it from our perspective, but Matt obviously would love your
perspective as well, which is I think there are certainly
there are avenues that you can get access to financial
you know markets, right, And to your point, James, many
companies say, okay, when the bank, when the market's open,
I can go down the path of using the syndicated
loan market, or syndicated bond market, or syndicated investment grade market,
(09:19):
and I can dictate my own pricing and my own documents,
et cetera, and it might be cheaper and there are
definitely going to be times where a company might choose
to do that. In our view, we find that oftentimes
and not always, but oftentimes these companies would like to
have either a sizable investment, so you know, we did,
as you know, an eleven billion dollar financing for Intel
(09:40):
right or we're doing multi billion dollar transactions for sub
i G companies, and we can provide them certainty of pricing,
certainty of timing, certainty of execution, confidentiality if it's an
M and A, you know, a type of environment that
they're looking to kind of execute in. And oftentimes these
companies just want to be able to rely on something
(10:01):
that will be stable. Whereas the banks are definitely there
and partners to us, they're not always consistent. And while
it feels great right now, just given where we are
and the exuberants in the market, there will be a
time where the banks are inconsistent again. And having those
additional relationships and having diversity of your capital structure across
public and private, we're finding CFOs and management teams wanting
(10:22):
when they think about their forward expectations, So what.
Speaker 4 (10:25):
Type of size are we talking about here that you
guys could potentially take down. For you highlighted the Intel deal,
but are you talking to three billion, five billion, twenty billion?
What's the size that you guys could do if you
had a treasure CFO call you up and say, hey,
we'd like to do something here.
Speaker 3 (10:41):
Intel was definitely the largest that we've done, which was
eleven billion dollars, and that was for obviously an investment
grade counterpart. Typically, you know, we are doing anywhere between
one and three billion dollars in our subinvestment grade business,
and then in our investment grade business we can be
you know, five plus. So I think it's pretty beneficial
when you think about some of these companies looking for
(11:02):
that you know, soul relationship. There is the ability to
work with them flexibly if things change or circumstances adjust.
And so I think we're not the only ones doing this.
Clearly we have peers in the market, but it's not
that common that you have people that can write one
to five up to you know, north of ten billion
dollar transactions. And that's part of you know, the power
(11:23):
of bringing both our third party investors as well as
our insurance balance sheets together.
Speaker 2 (11:27):
Yeah.
Speaker 4 (11:27):
No, I mean, I think that's definitely true, just based
on dry powder and the total size. I just to
James's point, I do wonder like maybe the what are
the qualitative factors if I'm sitting in the treasures seat
at Caterpillar and I can come to market and issue
across the curve two tens thirties and you know, issuing
inside of what the IG spreads are for the index
(11:50):
at you know, seventy five eighty basis points. I'm assuming
you guys are are going to be charging a higher rate.
Is that the case? And if that is the case,
what are some of those ancillary benefits they can get
that you know, they're sort of doing an opportunity cost
or trade out for doing the public market.
Speaker 3 (12:07):
Yeah, I would say that we listen, We look at
the market in terms of competence as well. We cannot
be completely off side of what the company can achieve
in the syndicated market because to your point, we won't
get deals done. Yes, oftentimes we're able to structure excess
returns for ourselves and our investors. And some of the
qualitative things are whether it is so when you think
about an investment grede counterparty right when they're just issuing
(12:28):
corporate debt, that makes sense. Oftentimes they have two choices.
They can go down the syndicated path, or they can
go and try to raise equity. Raising equity has its
own issues as it relates to dilution as well as
just kind of control that the company may not want
to kind of continue to go down the path, or
if they're looking for more kind of bespoke financing, so
we want to create a financing against our chip manufacturer,
(12:51):
or we have more project finance opportunity that we need
multi billion dollar financing against. That takes a lot of diligence,
that takes a lot of time, that is not as
straightforward to conduct in the public markets, and so we
can actually bring that complexity to bear. In the case
of Intel, it was a really interesting opportunity because the
company did not want to take on more debt because
(13:12):
of just pressures in terms of leverage on their overall
capital structure. They wanted to structure it as equity. So
we did a minority equity position that we then worked
with various rating agencies and the like to figure out
how do we make this applicable and the best outcome
for insurance balance sheets. So being able to bring that
customized solution where you're optimizing for the company's balance sheet
(13:33):
alongside what we need to achieve for our investors is
pretty unique. But I would agree with you, Matt, if
it's kind of more of vanilla down the fairway. Yes,
you may just say, listen, I'm going to go down
the curve. I'm going to issue my debt as needed.
But I think as these companies look for strategic m
and A, whether they look for current a more infrastructure
or project based finance opportunities, you're going to need a
more flexible capital structure that can span equity to credit
(13:56):
and be all the things in between.
Speaker 4 (13:58):
So kind of keeping in that idea of funding for
different projects, how do you sort of view this idea
of the energy, energy transition and infrastructure investment is industrial
is going to be a sector where you guys feel
like you're going to see a ton of growth from
a private private credit standpoint, given guys like Caterpillar of
highlighted bullish views over the next five ten years for
(14:19):
their mining business, given the need for commodities like copper,
lithium and nickel, and you know, you look at ARPA
has spent just a fraction of the funds that are
available through the IIJA. So how do you see that
sort of unfurling over the intermediate term?
Speaker 2 (14:36):
I think I think you're spot on.
Speaker 3 (14:37):
I think that we believe, like most believe, that there
is going to be whether you call it an industrial
revolution or whether you focus you talk about energy transition.
I read recently we're talking about energy not just transition,
energy addition. So there are a lot of different terms
as it relates to kind of how do you capitalize
on what will be both you know, AI technology as
(14:58):
well as data center infrastructure. And then it's the data
center infrastructure that marries with what goes on with real
estate associated with the with those projects that is married
with the chip manufacturers that produce a GPUs that are
needed in the data center. So there is a lot there,
I think in our view, and whether you believe you know,
estimates of you know, multi trillion dollars that is going
(15:18):
to be needed to be invested in that broader ecosystem,
you know, we certainly think it's going to be a
growing need, and so we agree we think that that's going.
Speaker 2 (15:26):
To be a large area.
Speaker 3 (15:28):
Obviously, not all data centers, not all regions in which
you're building infrastructure. Not all commodities, to your point, will
be created equal, but our view is that that will
be a really interesting opportunity. You know, Apollo has a
climate business, you know, and an energy infrastructure business and
an energy equity as well as climate debt business, and
(15:48):
so we're just starting to build and we want to
make sure that we are assessing projects in the like
fairly inappropriately. But we think that that will be a
big theme for our investment over the next five to
ten years.
Speaker 1 (16:00):
To what's the extent is this kind of lending being
used to help investment grade companies avoid being cut to
junk in the example, for example, a triple B company
that cannot take on more leverage without losing its rating
once to borrow, but you know, we'll offer assets to
be secured against those, you know, to do that. Maybe
it's off the bounds sheet. I don't know, but is
(16:20):
that part of the equation here.
Speaker 3 (16:22):
Absolutely, absolutely, we are trying to ensure I mean, listen,
I think that there are companies that might be fallen
angels over time, that probably deserve to be fallen agents
or angels over time, and it's not our goal to
save those companies, so to speak. But I think it
is in our purview to work with those companies to
figure out ways that they can keep their rating but
(16:42):
still get the capital that they need in a way
that's prudent for their balance sheet. And optimizing their balance
sheet in partnership with what we can bring to bear
is definitely a key thing for us.
Speaker 1 (16:52):
And when we're looking at the broad pie all this stuff,
you know, on the asset based side, a lot of
its consumer stuff, which is you know, very widely dispersed,
and there's a lots of it. How do you source
those assets?
Speaker 3 (17:04):
Yeah, so Apollo has actually spent you know, I spent
some time talking about Athene. But a Theene, as I mentioned,
is our retirement service insurance company. It's a fixinuity business
and its most basic format that we started in two
thousand and nine, and because of a lot of the
investment grade investments that it needed, we couldn't just source
all of that from the corporate credit markets, and so
we decided over the last thirteen years to either build
(17:28):
or buy. You know, we have ten sixteen different platforms
excuse me that either are originating you know, any sort
of asset based finance. And we have another twenty five
plus that we have relationships with. So we have a
really broad ecosystem that is originating private asset based finance,
from aircraft finance to real estate to consumer to trade
(17:50):
finance and the like. And so we have these platforms
that are in the market every single day an assessing risk.
It doesn't necessarily mean that we're always very long aircraft lending.
It just means that we have the capability to do that.
And all of these platforms are also market participants, right,
so we provide those types of financings to other market participants.
Speaker 2 (18:09):
Should they should they want them.
Speaker 3 (18:11):
As you know, we culminated kind of our I shouldn't
say culminated, but part of our kind of you know,
growth within the platform business was the purchase of credits
with the Securitized Product Group, which we did in February
of last year, which is now called Atlas, which is
kind of a warehouse finance business. And so to your point,
we believe that there is a lot of different risk
(18:31):
and reward available with an asset based finance. The consumer,
to your point, is a big focus area of ours.
We're kind of bifurcating the consumer now, right because there
is obviously consumers that we think will be more at risk,
and we're actually focusing on consumers at our homeowners and
high fi coscore consumers when we're dealing with that sort
(18:52):
of lending opportunity, and so we're long kind of consumer lending.
If the end consumer meets the criteria that we think
is high quality. We believe that there is opportunity in
residential real estate. We have select commercial real estate. In
financial assets, you know, we are focused more on kind
of bank transfer and SRTs and right now we're a
(19:15):
little bit more bearish on the hard assets.
Speaker 1 (19:17):
And you bundle all those up into a structure and
you know, you sell that on how do you monitor
the underlying you know, what do you do to track that?
And how do you I mean it's not something you're
constantly putting a mark on. I mean, it's not traded,
So what do you what do you how do you
value it?
Speaker 2 (19:31):
Yeah, no, it's it's a great question.
Speaker 3 (19:32):
We have I'm going to get the number wrong, but
we have, you know, dozens of quants that are every
single to your point, every one of these loans, every
one of these asset categories is super complex and you
need to monitor and they're not the same, right, Well,
how you would value kind of a trade finance opportunity
versus an SRT versus a residential mortgage loan, even if
(19:54):
on a pooled basis, is very different. And so we
have many people that are focused every day in terms
of how do we assess them, what are the key attributes,
where do we figure we're delinquencies following, what are recoveries
looking like? And if we think about our business, you know,
we have deployed over two hundred billion dollars in asset
base finance and we've had you know, less than a
one point three basis point loss, you know, since the
(20:15):
history of us doing it. So our focus on very
high quality investment grade risk does protect.
Speaker 2 (20:20):
In some ways.
Speaker 3 (20:21):
And then we are you know, we have strategies and
funds to your point, that are marked on a monthly basis,
and so we have to get outside, you know, arms
length valuation agents to work with our internal capabilities to
make sure that we are providing that transparency to investors.
Speaker 4 (20:36):
What are those of those generally illiquid like if if
we're looking at this from an investment standpoint, am I
trading off higher returns for less liquidity? In the primary
market or the private market versus.
Speaker 3 (20:49):
Public Yeah, I think that our view is that generally speaking,
you can get between one hundred and fifty to two
hundred basis points. You know, depends on the market. So
maybe one hundred to two hundred basis points of excess
spread compared to the public markets because they are less liquid,
But it depends on the asset class. So for example,
when you think about you know, corporate investment grade risk,
(21:11):
you know those are as you know, kind of maturities
of ten, fifteen, twenty five years, and so that is
obviously you know, quote unquote less liquid or you know,
has a longer maturity.
Speaker 2 (21:21):
But in a world where people.
Speaker 3 (21:22):
Want duration, that's a good thing in asset base. If
you're thinking about warehouses, you know, those are six to
eighteen month kind of warehouses that are available, and so yes,
is it kind of difficult to necessarily transact on a
day to day basis, perhaps, but you're also looking at
shorter maturity.
Speaker 2 (21:37):
So I think that our control of the.
Speaker 3 (21:40):
Ecosystem and the ability to provide that bespoke financing in
a way that's cornered candidly a big part of the
market allows us to create that access return.
Speaker 1 (21:49):
But you told to investors about this. I guess all
the time now when you're fundraising and you're talking about
more return for less risk, some of them must say, well,
that's just too good to be true. What do you
tell them response?
Speaker 2 (22:01):
It's a good question. Many people do say it's too
good to be true.
Speaker 3 (22:04):
I think that we say that it depends on what
it's what it's relative to. So I would say a
couple things. So I think we talked to investors. You know,
we spend a time across the globe talking to investors
in every you know, region has different nuances and what
they're objectives that they're trying to achieve. I would say
that when you think about traditional aults, right, and the
risk return that investors expect out of that bucket, I
(22:26):
would say that those are those are high returns, and
many of them have be able to achieve it, whether
that's through private credit that is corporate but more in
the subordinated end, whether that's through you know, more equity
like risk, or even through to private equity. And we're
saying that we actually don't, you know, in our credit business,
we're not targeting those types of returns we're saying, actually,
(22:46):
we will return lower than that, but we will do
it with safer risk. Well, we're saying we're going to
get you more return. Is in the fixed income market
in particular, where we're saying, you're invested in daily liquid product,
Why are you doing that? You're doing that because you
think that you need daily liquidity. Do you actually need
daily liquidity? Also, the daily liquid indices aren't daily liquid
(23:08):
right when when you look at the underlying constituents of
the investment grade market, fifty depending on which study you
look at or which analysis you do, fifty to seventy
percent are in smaller odd lot deals or legacy, you know,
older maturity type of transactions, which just do not transact
that easy on a single name basis. The indicies are
misleading because they're so they're so concentrated at the top
(23:30):
end of the market that it makes it seem like
it's more liquid. And what we're saying is actually, one,
your etfsen, your liquid, your liquid is exposure is not
that liquid. And two, if you come with us and
you kind of take a portion of your portfolio and
just think about doing a little bit less liquid, you
can increase a portion of your spread on that portion.
Speaker 4 (23:49):
Yeah, I mean that that's definitely a strategy, at least
within investment grade corporates, is to sort of buy the
off the run issue that trades a little bit wider,
so you're giving up some liquidity, but you're picking up
a lot more spread relative to some on the run issues.
Is that sort of the secret sauce here, because I
think you guys have have highlighted or at least put
out some some white papers pointing out that the private
(24:12):
IG allocation, you guys can pick up about three hundred
base points of excess spread and it looks like that's
more or less a liquidity train off between daily marking
and monthly But you know that's I mean three inderd
base points. We're talking about something that right now is
at least wider than the high yield US Corporate Index.
(24:33):
And you know, we had Matt Brill, who is the
head of Investment Great Credit from Investco at our year
end outlookment last year who said, we're you know, we're
at like seventy five eighty base points on the IG
index and we're going to fifty five and twenty five
next year, which is is pretty tight so can you
maybe unpack how you guys are picking up so much
more spread relative to the sort of be the traditional
(24:55):
benchmark indicies. Clearly there's shortcomings that you clearly pointed out
and obviously in the student observation, but three hundred overs
is pretty impressive.
Speaker 3 (25:06):
Yeah, three hundred over is a it's significant to your point,
and part of that is the kind of bespoke transactions
that we will do for the intels of the world,
or for Air France, or for Sony or for Anheiser
Bush that you've seen that we've done over the last
few years, which are multi billion dollars that are structured
in a way that either kind of look and feel
(25:28):
to the company equity like. But still, you know, we
can get rated through our own through third party rating
agencies that give us beneficial kind of treatment because the
underlying and the look through is clearly investment rate and
clearly incredibly high quality. And so that's one way that
you get access spread is through kind of doing these
very large transactions with corporates that are off balance sheet
(25:48):
that look and feel different and optimize for their own concerns.
And the second way is in our asset base finance business,
right in our warehouse business, and in all the different
areas that we are leaning into. I think one of
the things that you know when you think about and
this has been an education for ourselves internally as well
as externally.
Speaker 2 (26:07):
And we'll see if we're successful.
Speaker 3 (26:08):
Like there's no guarantees in life, but you know, when
you think about an investment grade, you know, in exposure.
When you look at the typical public pension plan or
you look at the typical institutional investor, the majority of
what they're doing is in corporate to your point, matt On,
you know, buying the index and getting exposure to both
off the run and on the run exposure and bonds.
Our view is that, you know, that is one area
(26:30):
to get investment grade exposure, but also asset base finance
where you can get higher yields right now, and you
can if you are able to pick your spots across
a very diverse set of opportunities, you can really be
able to achieve a little bit of excess spread married
with some of these larger private corporate opportunities. That's how
(26:50):
we kind of get to the math of getting you
to that, you know, multi hundred basis points of exs.
Speaker 1 (26:54):
Spread today, is it sustainable? I mean, can you continue
to make that next year and the year.
Speaker 2 (26:58):
Off to I think it's going to be.
Speaker 3 (27:00):
And I think that we our view is that the
private markets are only expanding, right, And so I think
that if you believe like we do, that public markets
and private markets are going to converge and that means
that private markets will likely expand, then yeah, there might
be some spread compression, right because you will see more
private credit becoming more and more mainstream, which would define
(27:21):
you to have more compression and spread. I think that
as long as we can continue to be discerning and
not have to put out risk. So what I mean
by that is we don't have a business where we
have to put out x hundred million or x billion
dollars in resume marketers. We can be like, okay, resine
marketers right now are interesting or not interesting, and we
(27:42):
can really ascertain and then within that where are the
interesting areas to be in to not be? And so
I think if you are able to app consistently try
to uncover where the relative value is, you should be
able to outperform. But to your point is that what
is the magnitude? I think that remains to be sae.
Speaker 1 (28:00):
One of our guests recently said, in the contexts of
this market and the growth of it, everyone wants to
be Apollo, which is obviously flattering, but also there's a
target on your on your back. So how do you
stay ahead? I mean, what what do you how do
you innovate? How do you I mean, it can't all
just be scale. Obviously you were there a bit earlier,
but you know, how do you maintain that edge?
Speaker 3 (28:21):
It's very it's very kind that your guests said that,
but but I but I do appreciate.
Speaker 2 (28:24):
I think from.
Speaker 3 (28:25):
Our perspective, you know, we I would say Mark is
done and Marcron has done an incredible job about trying
to figure out where is the puck going and so
whether that was the evolution of our you know, exposure
to private credit building beyond just direct lending, through to
asset base, through to investment grade now kind of you know,
(28:47):
we've built our business candidly in our third party investment
business or through a party capital business, predominantly via the
alt's bucket right, which which we've talked about. I think
it was pretty it's pretty interesting that we're now thinking
about Okay, how do we utilize or really vast experience
via retirement service business to think about the fix income allocation,
(29:08):
which is a completely different part of the portfolio that
we weren't really necessarily targeting before.
Speaker 2 (29:13):
And so I think just trying.
Speaker 3 (29:14):
To make sure that we are understanding where trends are
going and how to really make the most sense for investors'
balance sheets. Part of the reason why some people lose
and we haven't been immune to this either, is they
come up with an idea that makes a lot of
sense for their business, and then it's about how do
you get that into and investor's hands and commercialize that
(29:34):
versus what are the needs that we're trying to solve
for and how do we make pensioneer's life better? And
I think by having I know, I keep saying it,
but this retirement services mindset, it allows us to do that.
Speaker 2 (29:46):
First.
Speaker 3 (29:47):
Mark's also been pretty vocal about how, you know, the
retirement business, the retirement industry for the US in general,
is something that needs to be you know, shaken up
a bit, right when you think about the four to
one k's that all of us have and the fact
that you can't get also in those businesses or in
those portfolios. That is an area that we think is
another is another room to grow. So I think for us,
(30:09):
it's about just making sure that we understand the state
of play, but aren't staying static and are thinking ahead
in terms of how to incorporate what we know in
broad based way and.
Speaker 1 (30:19):
How do the regulators come into that.
Speaker 2 (30:21):
It's a great point.
Speaker 3 (30:22):
So I think that you know, one of the things
that people always say is, you know, we aren't necessarily
regulated like a bank, which is true, but we are
regulated like an insurance company which has its.
Speaker 2 (30:31):
Own federal state number.
Speaker 3 (30:33):
We have, we publish all of our positions, We have
to be hyper transparent. It is an incredibly regulatory, regulatory
driven environment and business to be in, and so we
spend a lot of time with the regulators and we
want to continue to make sure that we are being
transparent and operating invest in class. And so you know,
whether it's the new administration or you know, other areas
(30:54):
of government, I think that you'll find that we will
try to be constructive to get to the best outcome and.
Speaker 4 (31:00):
Pensioners and retirees like I am one of those retirees
who has is part of that seven and a half
trillion dollar four oh one KPI. So is this is
this an opportunity that only guys like Apollo can can
take place in or is this something that I can
participate via ETF or some other mechanism, because these kind
of returns with you know, single a tier credit quality
(31:21):
is pretty impressive. No.
Speaker 3 (31:24):
I think that our goal, again speaking you know, high level,
is that you me, everyone can benefit from, you know,
utilizing private assets in your portfolio, whether it's a four
to one.
Speaker 2 (31:35):
K or otherwise.
Speaker 3 (31:36):
And you know, we are really working with a number
of different partners to figure out how to introduce you know,
our assets, our business, et cetera in ways that can
be consumed via these markets that have historically been very
ETF and mutual fund heavy. You know, we you know,
we're just added to the SMP a week ago, which
was a huge milestone for us. It shows the institutionalization
(31:59):
of our business, our strategy. It was a great testament.
But also it allows, you know, if you believe, in
some way, broader investors to get access to private markets
via our company. And so whether that's through you know,
just the broad based exposure through the SMP, or for
us to be able to get more included and provide
assets within ETF and mutual funds over time that should
benefit everybody.
Speaker 1 (32:20):
But if I look at the S and P, I mean,
I just keep making twenty percent every year by doing nothing,
and if it all goes wrong, the Fed's going to
come in and help. Why should I get into something
really esoteric that I don't understand and it's all you know,
there's no transparency and it's you know, it's just weird stuff.
Why would I do that and not just you know,
the easiest thing.
Speaker 3 (32:40):
It's it's hard to argue with when when you put
it that way, I think that like anything right, it's
it's about diversification. And so certainly the S and P
has just been completely a really strong asset to be in.
And to your point, I think that the new administration
is definitely going to be focused on supporting that, and
to your point, the FED will also be focused on
supporting it. So it's it's a great puct and continues
(33:00):
to have perform. But just generally speaking, having some diversification
in your portfolio is probably prudent.
Speaker 1 (33:06):
On the fundraising side. I'm interested in also how you
compete there because you know, there's places like for example,
the Middle East where there's you know, tons of interest,
there's tons of capital, but also loads of competition. I mean,
is there something that you do, particularly on the fundraising
side that gets you more mandates.
Speaker 4 (33:20):
Yeah.
Speaker 3 (33:20):
I think that we We've been very fortunate in terms
of our ability to raise capital globally. I think that
investors are getting you know, on the institutional side and
also candidly on the weld side, but also talk institutional first,
are really you know, getting more and more sophisticated. Obviously,
they're looking for broader partnerships, They're looking for creative ways. Right,
It's not only about having XYZ fund that you can
(33:44):
kind of invest in. It's that plus having a broader
partnership approach providing additional access. It's about you know, you've
seen in the press. We've worked with many large Middle
Eastern sovereign wealth funds to help stand up businesses and
provide us working capital in partnership with RIGHT and so
being able to have that relationship and not just be
so linear has been I think a big attribute to us.
(34:06):
And then our growth on the well side has been
I think tremendous. Some of our peers have done an
amazing job in wealth, but we have really spent a
lot of time and effort bringing the alts business alongside
our peers to the well channel, and it's still incredibly
underpenetrated when you think about the underlying constituents, and so
I think being creative. You know, you talked about complexity
(34:28):
right in terms of why would I be why would
I go down the complex route?
Speaker 2 (34:31):
But when you think about you.
Speaker 3 (34:32):
Know, BDCs and very basic access points for investors in
private credit, you know what's the next leg of that?
How do you get asset based finance in that structure?
So we're working through a lot of these things that
we think will ultimately be beneficial for wealth as well.
Speaker 1 (34:47):
You mentioned BDC's they are getting more pick interests, they
are you know, some of them are struggling. We are
hearing more mends, more extends, all that stuff. So you know,
this asset class is not without risk. What are you
saying right now that kind of worries you in tons
of the private markets.
Speaker 3 (35:05):
I think that all the things you mentioned, they are worrisome.
I think we if you look at our you know,
non traded BBC, we're very proud of the stats as
it relates to our peers in terms of pick and
other metrics. But that being said, it's an industry wide issue,
and you know, if an investor or several investors or
hundreds of investors have a bad experience, that will influence
(35:27):
the broader, broader market. I also think that, you know,
the gating mechanisms can be viewed in a positive or
negative light. Sometimes investors don't like to be gated, which
makes sense, but equally that protects their interests over time
and hopefully mutes volatility, you know, in terms of their experience.
And so I think that just making sure that we
as an industry are really focused on making sure that
(35:50):
the bar for what we're investing in is high, muting
volatility for end investors, and really trying to ensure that
we're not going down the path of any or a
bunch of lemy that's going to create more noise in
a structure that's supposed to be first, lean and safe
risk is really all that we can kind of ask for.
Speaker 1 (36:09):
I'm sure you're doing it, but there's so much cash
coming in in all markets, and there aren't enough deals,
and you know, there is therefore room for error you know,
we've had people on this show talk about how it's
not them that's going to do the bad deals. It's
the tourists, you know, it's other people that will you know,
mess up potentially. Do you see any signs of fraus
in this market, any signs that you know that some
(36:30):
deals are getting done that maybe shouldn't get done.
Speaker 2 (36:33):
Absolutely. I mean, I think that we've been seeing this.
Speaker 3 (36:35):
It's funny because I'm sure you've been having this conversation
for a long time, and every time you think that
the private markets are at their tippy top, they're just
fire and higher and higher. And so there's certainly we
are passing on a lot of transactions. We are really
trying to be thoughtful. I think our business is unique
in terms of obviously we need to maintain the expectations.
Speaker 2 (36:57):
Of our investors in terms of deployment.
Speaker 3 (36:59):
And it's a push because investors come to us and say,
we credit spreads are tight, but yields are high, and
we want to be invested and we want to cash
hield and we want to make sure that we're in
the ground now married with what don't mess it up,
don't do something that we don't want to do, and
we want to make sure that you're still sticking to
your knitting in terms of the risk reward that you're taking.
And so we try to really be very prudent in
our deployment and ensure that we are being actively transparent
(37:23):
with investors in terms of pacing. But certainly there are
deals that are being done that we are passing on.
There are deals that are in our sub investment grade
business where there is a lot of you know, we've
talked about credit or and creditor violence, there's a lot
of lme when we engage in that, we try to
make sure that we're bringing the majority of the debt
stack along with us so that we're not going to
have future you know, debate and litigation. So it's about
(37:47):
just making sure that you pick your spots.
Speaker 1 (37:48):
Do you expect that to get worse though, as we
you know, have more inflow and potentially less net supply
across the board and fixed income and that's certainly what
we're seeing. Is twenty twenty five going to be a
year of you know, risky deals getting done.
Speaker 3 (38:02):
I think twenty twenty five will be a year of
higher rates, likely a strong economy, likely some buoyancy when
it comes to M and A deals. Probably some kind
of disparate treatment in sectors, particularly if you think about
the tear of certain things like that that might impact
certain geographies in certain sectors, and likely a continued bid
(38:23):
for private assets will which will create deals that are
done that probably shouldn't get done. You know, the triple
C part of the market is you know, yielding significantly
higher by design, right, because they are riskier types of transactions,
and so from our perspective, we just think that staying
top of the capital structure first, lean in really high
quality credits is where you are probably safest, and we
(38:46):
try to avoid some of those other transactions.
Speaker 1 (38:49):
Are there any sectors that you think of particularly risky
at the moment in terms of the US economy.
Speaker 3 (38:54):
I think that, you know, the most obvious one is
kind of autos, right, I think just given some of
the protectionist tariffs that might in particularly with Canada and Mexico,
we're a little bit bearished at now on the electric side.
Hopefully that will be you know, offset in some degree.
We are bearish like most people in terms of office
within CRE and what that means for retail and the like.
(39:16):
But generally speaking, pretty constructive overall.
Speaker 1 (39:20):
I'm interested in also your global view because everybody's loaded
up on US assets. Global is in your titles, so
hopefully we can draw you to other countries. But you
know what else is out there in terms of opportunity
for Apollo not US.
Speaker 3 (39:36):
I think that we are obviously very Our business is
very much focused on developed markets, so the US is
obviously the biggest part of that. Developed Europe is another
big part. You know, we have north of four hundred
people in Ourope in our London office, so we are
really building our European capabilities across both direct lending in
the subinvestment grade market as well as in asset base finance.
(39:58):
It's a little bit more challenging right now asset base
financial just because, as you may know, there's a lot
of EU securitization risk retention laws that we were trying
to contend with. But equally, we think that there will
be opportunities to really construct portfolios that meet the criteria
of those regulations in a way that really hasn't been
done or at least in the scale that we hope
(40:19):
to do. And then you know, we're constructive on cire
X some of the things that we talked about.
Speaker 2 (40:24):
In Europe as well.
Speaker 3 (40:25):
Asia, we have a very large business as well, but
it is much more idiosyncratic in terms of the opportunities
that we tend to pursue. But we have a large
business out of our equity as well as our hybrid
equity businesses, so prefs and converts and things like that,
and then we pick our spots very specifically when it
comes to EM oriented opportunities. So it's a smaller part
(40:46):
of our business, but something that will probably grow over time.
Speaker 1 (40:48):
In Europe, is there any particular country focus.
Speaker 3 (40:51):
We do a lot in the UK for obvious reasons,
given our focus on kind of you know, safer yield
and mostly the UK, which is where we're spending a
lot of our time on cire and asset based finance.
Speaker 2 (41:04):
We will do some opportunities.
Speaker 3 (41:05):
For example, we've done some sports financing and media rights
from Portugal and Spain, which are more idiosyncratic, specific to
those circumstances where you're able to get long term contracted
cash flows based on meteor rights that have been agreed
to with you know, one or two parties. And then
we've done a couple of deals in France.
Speaker 1 (41:25):
And the like, and in Asia, any particular countries that
you tend to be more focused on.
Speaker 3 (41:29):
Where we've spent more time is what I call it
a pac generally speaking. So we've done a number of
deals in Australia and New Zealand, which obviously are much
more developed. We've done a couple transactions and I'm talking
credit you know, less so on the equity side in India,
but likely more of the you know, established markets is
where we tend.
Speaker 1 (41:49):
To focus interested instead of circling back to where we started.
This forty trillion number which constantly intrigues me. How soon
do we get there?
Speaker 2 (41:58):
I think we're going to get there really soon.
Speaker 3 (42:00):
Do I think that, you know, a lot of market
participants are starting to privatize.
Speaker 2 (42:06):
The asset based market. We're not alone in that, So
I think you're going to see.
Speaker 3 (42:09):
A lot more private credit offerings and strategies focused on
asset based and then you know, the investment grade part
I think will continue to you know, we'll work with
large companies and start to privatize more of their balances
over time.
Speaker 2 (42:23):
So I think I think we will get there soon.
Speaker 1 (42:24):
But what is it now in terms of just asset
based we.
Speaker 2 (42:27):
Estimated it's like twenty twenty trillion dollar.
Speaker 1 (42:29):
Market already, yeah, and could be forty when you say
very soon. Obviously, journalists we always look for numbers when
what give us a year, Come on, give me exact year.
Speaker 2 (42:40):
But I would I would, I was inspect within the
next five years you.
Speaker 1 (42:43):
Can okay, interesting, okay, And then in returns, I mean
you talked about how you know, the competition there will
be compression, convergence, all that stuff, but presumably if you
don't continue to offer excess, then you're not going to
grow at that rate. So you know, next next year returns.
Have you got any kind of number you could put
(43:03):
on that?
Speaker 3 (43:05):
James, you're really putting me out here in terms of returns,
I think that, you know, we we still think that
you can get you know, a couple hundred basis points
of access spread compared to the relevant benchmark across the
board if you kind of.
Speaker 2 (43:18):
Are, okay, taking a more private and illiquidity risk and.
Speaker 1 (43:21):
That's a next year, that's a next year cool, okay,
And then if you just had to put your finger
on one opportunity, I mean I do this every time,
and I know it's pity hard when you're a global person.
But single best credit market opportunity in terms of relative
value for next year, we.
Speaker 3 (43:36):
Actually think that they opportunity in there's it's hard to
say because we actually think there's a lot, but we
think commercial real estate is actually very very interesting in
terms of you.
Speaker 2 (43:46):
Know, where we are.
Speaker 3 (43:48):
There's been a lot of dry powder in the real
estate equity business and we saw you know, a twenty
to thirty percent repricing generally speaking, because people were very
bearish commercial and we didn't see the distress come through
outside of our and so that's an area where you
can really lean in and still get really interesting opportunities
if you're selective and if you're focusing on really interesting areas.
Speaker 2 (44:09):
And depending on.
Speaker 3 (44:10):
How you define commercial real estate, that can also include
financing of data centers in the like.
Speaker 2 (44:14):
So that's an area that we think is really interesting.
Speaker 1 (44:16):
Is that in the US, in the US, any particular
place in the US, any regional So.
Speaker 2 (44:20):
I think for US, we spent time well.
Speaker 3 (44:22):
I think travel has held up a lot better and
people expected and so we've worked with some of the
large hospitality programs across the US. Residential, you know, commercial,
but like for you know, broader areas within Florida have
been interesting just given the migration there.
Speaker 2 (44:41):
And then when you think about data.
Speaker 3 (44:42):
Centers and the like, you know, areas which have really
strong connections to the power grid, whether that's northern Virginia,
the texasssays, and certain areas North Carolina where we are
focused in terms of that area.
Speaker 1 (44:56):
You know, I'm a warrior. So what keeps you up
at night worrying about? You know, the market? I mean,
I generally people are very very bullish for next year.
The conference that that I was talking about, everyone was
very very excited about credit for twenty twenty five. And
yet you've got, you know, all the stuff going on
that I mentioned at the start. You've got you know,
potentially the FED has to pivot. That's what people would
(45:18):
be very concerned about. Then there's too much demand and
not enough supply. So those are things that worried me.
Speaker 4 (45:23):
What about you?
Speaker 2 (45:24):
I think you're right.
Speaker 3 (45:25):
I think if the FED pivots, that could be you know,
a big that would likely be difficult for the market
to digest. I think that, you know, for credit investors,
you know, higher for longer within reason is a great thing.
If that were to kind of completely reverse, you know,
we'd have to figure out other ways to attract and
(45:46):
return the returns that I mentioned. I think that, you know,
we're not without geopolitical risk, although it seems like the
market seems to digest that pretty easily for better or
for worse, and so you know, it's I think it'll
be more Our view is it'll be more sector specific
dispersion next year versus kind of broad based market volatility,
(46:08):
because to your point, it does seem like the economies
in a decent place. It does seem like the fet
is pretty much going to stay on course. You know,
inflation will have to kind of be monitored and ensure
that we kind of don't overextend ourselves. But whether that's
kind of the tariffs that I mentioned, whether that's cuts
from DOGE that are potentially forthcoming, who knows what will
happen there, as well as kind of m and a.
Speaker 2 (46:29):
With an m and a, there's winners of losers.
Speaker 1 (46:30):
To our last guests was very worried about group thing.
Is there anything you think you're absolutely contrarian on right
now that you're doing that other people have got wrong?
Speaker 3 (46:39):
I don't know, if it's like we think that we're
doing the others have gotten wrong. I think that we
have very deliberately positioned our business and I don't mean
to sound like a broken record on the higher quality
end of the spectrum. And I think that many of
our peers have built their businesses rightfully so and very
successfully slow on the other side, and so that I
think is a big differentiator for us and will win
out when there is volatile and when investors do you
(47:01):
try to pivot their portfolios holistically.
Speaker 1 (47:04):
Great stuff, Aquila Graywell, Global Head of Credit Products at Apollo,
It's been a pleasure having you on the Credit Edge Money.
Speaker 2 (47:09):
Thanks.
Speaker 1 (47:09):
Thank you, guys, and of course to Matt Goinner with
Bloomberg Intelligence, thank you very much for being on the show.
Thanks guys. Bloomberg Intelligence is part of Bloomberg's research department,
with five hundred analysts and strategists working across all markets.
Coverage includes over two thousand equities and credits, as well
as outlooks on more than ninety industries and one hundred
market industries, currencies and commodities. Please do subscribe wherever you
(47:30):
get your podcasts. We're on Apple, Spotify, and all other
good providers, including the Bloomberg terminal at bpod Go, give
us a review, tell your friends, or email me directly
at jcromby eight at Bloomberg dot net. I'm James Crombie.
It's been a pleasure having you join us again. Next
week on the Credit Edge
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Aquila Graywall, global
head of credit product at Apollo. How are you, Aequila,
I'm great.
Speaker 2 (00:29):
Thank you so much for having me, James.
Speaker 1 (00:30):
Thank you so much for joining us. So we're very
excited to get your credit market views, and also delighted
to welcome back Matt Goitner with Bloomberg Intelligence. Hello Matt
Way everyone. So just to set the scene a bit
here at the top, US markets are rallying as rates
come down, the economy keeps chugging along, and investors look
forward to a new US administration, which the bulls think
will be very pro growth, pro markets. Credit markets are
(00:51):
on fire. There's a ton of demand for yield, and
we've seen a huge amount of borrowing by companies, with
a lot more to come in twenty twenty five. Private
debt in particular has experience of meteoric rise. It's now
a one point six trillion dollar market, but it could
well be worth tens of trillions of dollars more when
you wrap in all the potential asset based finance. Forty
trillion is the number we're going to talk about today,
(01:12):
almost as big as the S and P five hundred.
So we potentially have very rapid market expansion, tight bond spreads,
and ever increasing demand. But that doesn't all mean zero risk.
The Fed's cutting rates, but treasury yields are stuck above
four percent, and the stated aims of the next government
all sound very inflationary, signaling a period of higher for longer.
(01:33):
That means elevated debt costs, which will hurt borrowers across
the board, especially the weaker ones. We're already seeing more
defaults and bankruptcies in private markets. There's more amending and
extending of loans, while some lenders are having to get
repaid with more debt the so called payin kind deals,
which aren't always good good for the market. In the background,
we have a lot of geopolitical risk, which will only
(01:55):
be amplified by the Trump trade wars. Plus the threat
of US recession hasn't gone away. A downturn would cause
more distress in credit markets. So Akila, where do we
go from here? Is credit still a great place to
be in twenty twenty five?
Speaker 2 (02:09):
Well, listen.
Speaker 3 (02:10):
I think that those are really compelling and actually very
telling statistics that you that you work walk through. I
think for us, we absolutely believe that private credit and
credit is an enduring asset class for investors, and we
expect based on all the comments that you made, whether
it's higher for longer, a stronger economy, not without risks
that we can talk about, but having credit exposure in
(02:32):
your portfolio really will allow investors to capitalize on higher
yielding assets in a safe way for over the long term.
Speaker 1 (02:40):
But why private markets, Why is that all the rage suddenly?
And how do you come up with that forty trillion
dollar number. It's it's obviously much more than our other
guests expect. Some say more like thirty trillion, others say
closed to five trillion. So why so big?
Speaker 3 (02:52):
Yeah, so we've been saying forty trillion for a while,
and it's a good question. I think when you think
about the direct lending sub and grade, that one point
seven trillion dollar number is obviously very well quoted and
very well established. I think when we think about private markets,
we think it includes not just corporate credit below investment grade,
but also corporate credit that is investment grade. Which is
(03:14):
obviously a very sizable and large market in and of itself.
And then when you add in all the asset based
finance opportunities, including investment grade and non investment grade, that
is a very wide ecosystem. And we can talk about
asset base finances. As you well know, it touches every
single part of what we do as a consumer, as
a business, et cetera. And we think that that whole
(03:35):
market to collectively can get you to that forty trillion
dollar rough number.
Speaker 4 (03:39):
Yeah, thank you. So I'm part of the corporate credit bucket,
so I call it covered the industrial sector. So this
year we've seen issuance up twenty percent from last year,
but that total is just one hundred billion dollars relative
to forty trillions. So we're talking about a splinter of
opportunity in terms of the total addressable markets. So can
you kind of take a step back and maybe breakdown
(04:01):
or bucket at that forty trillion? Where does where does
corporate credit sit within that hierarchy? Is it twenty five percent,
is it fifty percent, is it ten percent? How does
that sort of flow up?
Speaker 3 (04:12):
Yeah, I think that we think of the asset base
finance world as roughly fifty to sixty percent let's just say,
of the of the forty trillion dollar number, and then
we have kind of the balance that will be across
corporate both in investment grade and not investment grade. And
obviously the sub ig corporate credit business and as a
category is probably in that kind of two trillion dollar number.
(04:33):
In the balance is private policements and other kind of
corporate investment grade type dead.
Speaker 1 (04:37):
And when you break down the opportunity, I mean there
are different parts of the pie. What do you think
are the biggest let's say three areas to hit for
next year?
Speaker 3 (04:46):
I think that for us, you know, we think that
there are a couple different things. I think we pardon
parcel of this entire discussion that you know, hopefully we'll
have today about private credit is the growth and expansion
of that market. And we, as you may have heard
or seen us, let's talk about we actually believe that
there's going to be continued convergence between what has historically
been public credit and private credit. And we expect that
(05:08):
convergence to continue. And so whether that gets anchored in
a forty trillion dollar number or a large one over time,
I think remains to be seen, but we think that,
you know, having a portfolio that both can invest in
public and private assets is really compelling. So, you know,
from our perspective, there's been a lot of kind of
discussion around public markets historically been really safe and private
(05:29):
markets deemed you know, quote unquote more risky, and that
could be because of illiquidity or perceived lack of transparency.
Our view is that, you know, everything is relative, but
private credit can actually be quite safe. And so in
terms of you know, three themes James to your point
that we think are going to continue to be pervasive
over the next year and beyond is kind of this
(05:50):
public and private market convergence. There is the accessing fixed
income replacement that's not just public credit but also in
private credit format. So when you think of about very
large institutions that have huge balance sheets that are really
looking at their fixing come portfolios as daily liquid product,
but they have twenty to thirty year you know, investment horizons,
(06:11):
pivoting a part of that portfolio to private assets actually
is very compelling but also prudent. And then the third
is you're seeing this now. I mean, we've been talking
about asset based it feels like a long time, but
equally not that long if you think about this year alone,
which we think that when you think about private credit
and direct lending, that has been the cornerstone of acid
allocations in private credit. But moving to asset based as
(06:34):
a diversifier in that portfolio is also a theme that
we think will continue.
Speaker 4 (06:37):
But if you're doing that, are you going down the
credit quality spectrum? Like what it's all investment grade? Or
for you guys, are you guys looking at exposure below
investment grade? Is how do you guys judge or measure
I guess risk adjusted returns? Like your definition is typically
like the sharp ratio of return of the private credit
(06:57):
portfolio less risk free over sigma for the portfolio, or
how are you guys measuring those risk adjusted returns?
Speaker 2 (07:05):
Yeah, I think it's a great question.
Speaker 3 (07:06):
So I think that there's obviously kind of sharp ratio
which is, as you defined, kind of per unit of
excess risk over risk free and volatility constituents as well.
I think that that is definitely a way and one
way that we look at it. So when you take
a step back, Apollo's business is a seven hundred and
thirty billion dollar business, of which you know nearly six
(07:27):
hundred billion dollars was within our credit business, of which
nearly three hundred billion dollars is from a theine in
our retirement service business. So a lot of what we
do when you think about safe yield and safe risk
is really because we have to manage on behalf of
our insurance balance sheets, which by definition need to be
in predominantly investment grade risk. And so we're invested in
(07:50):
very high quality, top of the capital structure, safe investment
grade type opportunities by virtue of one needing to from
a regulatory perspective, but also because we think that you
can get at outsize and excess return compared to a benchmark,
and so your point at is well taken, which is
at measuring excess return per unit of risk is obviously
one how you outperform visa V volatility in the broader market,
(08:13):
but also to how you outperform a relative to the
index that's taking similar risk. When you think about a
Pollo's credit business, we virtually have no second lean risk.
We focus on top of the capital structure first lean secured,
irrespective of investment grade or not. And so from our perspective,
we still think that you're able to create compelling risk
reward by attaching higher than the capitol structure.
Speaker 1 (08:36):
I'd get that from an investive perspective, and obviously we've
had a lot of investors talking about the opportunity from
that standpoint, but from a borrower's point of view, from
an issue, and I'd be interested in both of your views,
because you know, Matt, you cover this day and day out.
CFO is a very sensitive to the smallest change in
funding costs. Why should they do it this way? On
the Facebook it looks more expensive, so why would they
(08:57):
do it?
Speaker 3 (08:58):
I think it's a great question, and I'll talk about
it from our perspective, but Matt obviously would love your
perspective as well, which is I think there are certainly
there are avenues that you can get access to financial
you know markets, right, And to your point, James, many
companies say, okay, when the bank, when the market's open,
I can go down the path of using the syndicated
loan market, or syndicated bond market, or syndicated investment grade market,
(09:19):
and I can dictate my own pricing and my own documents,
et cetera, and it might be cheaper and there are
definitely going to be times where a company might choose
to do that. In our view, we find that oftentimes
and not always, but oftentimes these companies would like to
have either a sizable investment, so you know, we did,
as you know, an eleven billion dollar financing for Intel
(09:40):
right or we're doing multi billion dollar transactions for sub
i G companies, and we can provide them certainty of pricing,
certainty of timing, certainty of execution, confidentiality if it's an
M and A, you know, a type of environment that
they're looking to kind of execute in. And oftentimes these
companies just want to be able to rely on something
(10:01):
that will be stable. Whereas the banks are definitely there
and partners to us, they're not always consistent. And while
it feels great right now, just given where we are
and the exuberants in the market, there will be a
time where the banks are inconsistent again. And having those
additional relationships and having diversity of your capital structure across
public and private, we're finding CFOs and management teams wanting
(10:22):
when they think about their forward expectations, So what.
Speaker 4 (10:25):
Type of size are we talking about here that you
guys could potentially take down. For you highlighted the Intel deal,
but are you talking to three billion, five billion, twenty billion?
What's the size that you guys could do if you
had a treasure CFO call you up and say, hey,
we'd like to do something here.
Speaker 3 (10:41):
Intel was definitely the largest that we've done, which was
eleven billion dollars, and that was for obviously an investment
grade counterpart. Typically, you know, we are doing anywhere between
one and three billion dollars in our subinvestment grade business,
and then in our investment grade business we can be
you know, five plus. So I think it's pretty beneficial
when you think about some of these companies looking for
(11:02):
that you know, soul relationship. There is the ability to
work with them flexibly if things change or circumstances adjust.
And so I think we're not the only ones doing this.
Clearly we have peers in the market, but it's not
that common that you have people that can write one
to five up to you know, north of ten billion
dollar transactions. And that's part of you know, the power
(11:23):
of bringing both our third party investors as well as
our insurance balance sheets together.
Speaker 2 (11:27):
Yeah.
Speaker 4 (11:27):
No, I mean, I think that's definitely true, just based
on dry powder and the total size. I just to
James's point, I do wonder like maybe the what are
the qualitative factors if I'm sitting in the treasures seat
at Caterpillar and I can come to market and issue
across the curve two tens thirties and you know, issuing
inside of what the IG spreads are for the index
(11:50):
at you know, seventy five eighty basis points. I'm assuming
you guys are are going to be charging a higher rate.
Is that the case? And if that is the case,
what are some of those ancillary benefits they can get
that you know, they're sort of doing an opportunity cost
or trade out for doing the public market.
Speaker 3 (12:07):
Yeah, I would say that we listen, We look at
the market in terms of competence as well. We cannot
be completely off side of what the company can achieve
in the syndicated market because to your point, we won't
get deals done. Yes, oftentimes we're able to structure excess
returns for ourselves and our investors. And some of the
qualitative things are whether it is so when you think
about an investment grede counterparty right when they're just issuing
(12:28):
corporate debt, that makes sense. Oftentimes they have two choices.
They can go down the syndicated path, or they can
go and try to raise equity. Raising equity has its
own issues as it relates to dilution as well as
just kind of control that the company may not want
to kind of continue to go down the path, or
if they're looking for more kind of bespoke financing, so
we want to create a financing against our chip manufacturer,
(12:51):
or we have more project finance opportunity that we need
multi billion dollar financing against. That takes a lot of diligence,
that takes a lot of time, that is not as
straightforward to conduct in the public markets, and so we
can actually bring that complexity to bear. In the case
of Intel, it was a really interesting opportunity because the
company did not want to take on more debt because
(13:12):
of just pressures in terms of leverage on their overall
capital structure. They wanted to structure it as equity. So
we did a minority equity position that we then worked
with various rating agencies and the like to figure out
how do we make this applicable and the best outcome
for insurance balance sheets. So being able to bring that
customized solution where you're optimizing for the company's balance sheet
(13:33):
alongside what we need to achieve for our investors is
pretty unique. But I would agree with you, Matt, if
it's kind of more of vanilla down the fairway. Yes,
you may just say, listen, I'm going to go down
the curve. I'm going to issue my debt as needed.
But I think as these companies look for strategic m
and A, whether they look for current a more infrastructure
or project based finance opportunities, you're going to need a
more flexible capital structure that can span equity to credit
(13:56):
and be all the things in between.
Speaker 4 (13:58):
So kind of keeping in that idea of funding for
different projects, how do you sort of view this idea
of the energy, energy transition and infrastructure investment is industrial
is going to be a sector where you guys feel
like you're going to see a ton of growth from
a private private credit standpoint, given guys like Caterpillar of
highlighted bullish views over the next five ten years for
(14:19):
their mining business, given the need for commodities like copper,
lithium and nickel, and you know, you look at ARPA
has spent just a fraction of the funds that are
available through the IIJA. So how do you see that
sort of unfurling over the intermediate term?
Speaker 2 (14:36):
I think I think you're spot on.
Speaker 3 (14:37):
I think that we believe, like most believe, that there
is going to be whether you call it an industrial
revolution or whether you focus you talk about energy transition.
I read recently we're talking about energy not just transition,
energy addition. So there are a lot of different terms
as it relates to kind of how do you capitalize
on what will be both you know, AI technology as
(14:58):
well as data center infrastructure. And then it's the data
center infrastructure that marries with what goes on with real
estate associated with the with those projects that is married
with the chip manufacturers that produce a GPUs that are
needed in the data center. So there is a lot there,
I think in our view, and whether you believe you know,
estimates of you know, multi trillion dollars that is going
(15:18):
to be needed to be invested in that broader ecosystem,
you know, we certainly think it's going to be a
growing need, and so we agree we think that that's going.
Speaker 2 (15:26):
To be a large area.
Speaker 3 (15:28):
Obviously, not all data centers, not all regions in which
you're building infrastructure. Not all commodities, to your point, will
be created equal, but our view is that that will
be a really interesting opportunity. You know, Apollo has a
climate business, you know, and an energy infrastructure business and
an energy equity as well as climate debt business, and
(15:48):
so we're just starting to build and we want to
make sure that we are assessing projects in the like
fairly inappropriately. But we think that that will be a
big theme for our investment over the next five to
ten years.
Speaker 1 (16:00):
To what's the extent is this kind of lending being
used to help investment grade companies avoid being cut to
junk in the example, for example, a triple B company
that cannot take on more leverage without losing its rating
once to borrow, but you know, we'll offer assets to
be secured against those, you know, to do that. Maybe
it's off the bounds sheet. I don't know, but is
(16:20):
that part of the equation here.
Speaker 3 (16:22):
Absolutely, absolutely, we are trying to ensure I mean, listen,
I think that there are companies that might be fallen
angels over time, that probably deserve to be fallen agents
or angels over time, and it's not our goal to
save those companies, so to speak. But I think it
is in our purview to work with those companies to
figure out ways that they can keep their rating but
(16:42):
still get the capital that they need in a way
that's prudent for their balance sheet. And optimizing their balance
sheet in partnership with what we can bring to bear
is definitely a key thing for us.
Speaker 1 (16:52):
And when we're looking at the broad pie all this stuff,
you know, on the asset based side, a lot of
its consumer stuff, which is you know, very widely dispersed,
and there's a lots of it. How do you source
those assets?
Speaker 3 (17:04):
Yeah, so Apollo has actually spent you know, I spent
some time talking about Athene. But a Theene, as I mentioned,
is our retirement service insurance company. It's a fixinuity business
and its most basic format that we started in two
thousand and nine, and because of a lot of the
investment grade investments that it needed, we couldn't just source
all of that from the corporate credit markets, and so
we decided over the last thirteen years to either build
(17:28):
or buy. You know, we have ten sixteen different platforms
excuse me that either are originating you know, any sort
of asset based finance. And we have another twenty five
plus that we have relationships with. So we have a
really broad ecosystem that is originating private asset based finance,
from aircraft finance to real estate to consumer to trade
(17:50):
finance and the like. And so we have these platforms
that are in the market every single day an assessing risk.
It doesn't necessarily mean that we're always very long aircraft lending.
It just means that we have the capability to do that.
And all of these platforms are also market participants, right,
so we provide those types of financings to other market participants.
Speaker 2 (18:09):
Should they should they want them.
Speaker 3 (18:11):
As you know, we culminated kind of our I shouldn't
say culminated, but part of our kind of you know,
growth within the platform business was the purchase of credits
with the Securitized Product Group, which we did in February
of last year, which is now called Atlas, which is
kind of a warehouse finance business. And so to your point,
we believe that there is a lot of different risk
(18:31):
and reward available with an asset based finance. The consumer,
to your point, is a big focus area of ours.
We're kind of bifurcating the consumer now, right because there
is obviously consumers that we think will be more at risk,
and we're actually focusing on consumers at our homeowners and
high fi coscore consumers when we're dealing with that sort
(18:52):
of lending opportunity, and so we're long kind of consumer lending.
If the end consumer meets the criteria that we think
is high quality. We believe that there is opportunity in
residential real estate. We have select commercial real estate. In
financial assets, you know, we are focused more on kind
of bank transfer and SRTs and right now we're a
(19:15):
little bit more bearish on the hard assets.
Speaker 1 (19:17):
And you bundle all those up into a structure and
you know, you sell that on how do you monitor
the underlying you know, what do you do to track that?
And how do you I mean it's not something you're
constantly putting a mark on. I mean, it's not traded,
So what do you what do you how do you
value it?
Speaker 2 (19:31):
Yeah, no, it's it's a great question.
Speaker 3 (19:32):
We have I'm going to get the number wrong, but
we have, you know, dozens of quants that are every
single to your point, every one of these loans, every
one of these asset categories is super complex and you
need to monitor and they're not the same, right, Well,
how you would value kind of a trade finance opportunity
versus an SRT versus a residential mortgage loan, even if
(19:54):
on a pooled basis, is very different. And so we
have many people that are focused every day in terms
of how do we assess them, what are the key attributes,
where do we figure we're delinquencies following, what are recoveries
looking like? And if we think about our business, you know,
we have deployed over two hundred billion dollars in asset
base finance and we've had you know, less than a
one point three basis point loss, you know, since the
(20:15):
history of us doing it. So our focus on very
high quality investment grade risk does protect.
Speaker 2 (20:20):
In some ways.
Speaker 3 (20:21):
And then we are you know, we have strategies and
funds to your point, that are marked on a monthly basis,
and so we have to get outside, you know, arms
length valuation agents to work with our internal capabilities to
make sure that we are providing that transparency to investors.
Speaker 4 (20:36):
What are those of those generally illiquid like if if
we're looking at this from an investment standpoint, am I
trading off higher returns for less liquidity? In the primary
market or the private market versus.
Speaker 3 (20:49):
Public Yeah, I think that our view is that generally speaking,
you can get between one hundred and fifty to two
hundred basis points. You know, depends on the market. So
maybe one hundred to two hundred basis points of excess
spread compared to the public markets because they are less liquid,
But it depends on the asset class. So for example,
when you think about you know, corporate investment grade risk,
(21:11):
you know those are as you know, kind of maturities
of ten, fifteen, twenty five years, and so that is
obviously you know, quote unquote less liquid or you know,
has a longer maturity.
Speaker 2 (21:21):
But in a world where people.
Speaker 3 (21:22):
Want duration, that's a good thing in asset base. If
you're thinking about warehouses, you know, those are six to
eighteen month kind of warehouses that are available, and so yes,
is it kind of difficult to necessarily transact on a
day to day basis, perhaps, but you're also looking at
shorter maturity.
Speaker 2 (21:37):
So I think that our control of the.
Speaker 3 (21:40):
Ecosystem and the ability to provide that bespoke financing in
a way that's cornered candidly a big part of the
market allows us to create that access return.
Speaker 1 (21:49):
But you told to investors about this. I guess all
the time now when you're fundraising and you're talking about
more return for less risk, some of them must say, well,
that's just too good to be true. What do you
tell them response?
Speaker 2 (22:01):
It's a good question. Many people do say it's too
good to be true.
Speaker 3 (22:04):
I think that we say that it depends on what
it's what it's relative to. So I would say a
couple things. So I think we talked to investors. You know,
we spend a time across the globe talking to investors
in every you know, region has different nuances and what
they're objectives that they're trying to achieve. I would say
that when you think about traditional aults, right, and the
risk return that investors expect out of that bucket, I
(22:26):
would say that those are those are high returns, and
many of them have be able to achieve it, whether
that's through private credit that is corporate but more in
the subordinated end, whether that's through you know, more equity
like risk, or even through to private equity. And we're
saying that we actually don't, you know, in our credit business,
we're not targeting those types of returns we're saying, actually,
(22:46):
we will return lower than that, but we will do
it with safer risk. Well, we're saying we're going to
get you more return. Is in the fixed income market
in particular, where we're saying, you're invested in daily liquid product,
Why are you doing that? You're doing that because you
think that you need daily liquidity. Do you actually need
daily liquidity? Also, the daily liquid indices aren't daily liquid
(23:08):
right when when you look at the underlying constituents of
the investment grade market, fifty depending on which study you
look at or which analysis you do, fifty to seventy
percent are in smaller odd lot deals or legacy, you know,
older maturity type of transactions, which just do not transact
that easy on a single name basis. The indicies are
misleading because they're so they're so concentrated at the top
(23:30):
end of the market that it makes it seem like
it's more liquid. And what we're saying is actually, one,
your etfsen, your liquid, your liquid is exposure is not
that liquid. And two, if you come with us and
you kind of take a portion of your portfolio and
just think about doing a little bit less liquid, you
can increase a portion of your spread on that portion.
Speaker 4 (23:49):
Yeah, I mean that that's definitely a strategy, at least
within investment grade corporates, is to sort of buy the
off the run issue that trades a little bit wider,
so you're giving up some liquidity, but you're picking up
a lot more spread relative to some on the run issues.
Is that sort of the secret sauce here, because I
think you guys have have highlighted or at least put
out some some white papers pointing out that the private
(24:12):
IG allocation, you guys can pick up about three hundred
base points of excess spread and it looks like that's
more or less a liquidity train off between daily marking
and monthly But you know that's I mean three inderd
base points. We're talking about something that right now is
at least wider than the high yield US Corporate Index.
(24:33):
And you know, we had Matt Brill, who is the
head of Investment Great Credit from Investco at our year
end outlookment last year who said, we're you know, we're
at like seventy five eighty base points on the IG
index and we're going to fifty five and twenty five
next year, which is is pretty tight so can you
maybe unpack how you guys are picking up so much
more spread relative to the sort of be the traditional
(24:55):
benchmark indicies. Clearly there's shortcomings that you clearly pointed out
and obviously in the student observation, but three hundred overs
is pretty impressive.
Speaker 3 (25:06):
Yeah, three hundred over is a it's significant to your point,
and part of that is the kind of bespoke transactions
that we will do for the intels of the world,
or for Air France, or for Sony or for Anheiser
Bush that you've seen that we've done over the last
few years, which are multi billion dollars that are structured
in a way that either kind of look and feel
(25:28):
to the company equity like. But still, you know, we
can get rated through our own through third party rating
agencies that give us beneficial kind of treatment because the
underlying and the look through is clearly investment rate and
clearly incredibly high quality. And so that's one way that
you get access spread is through kind of doing these
very large transactions with corporates that are off balance sheet
(25:48):
that look and feel different and optimize for their own concerns.
And the second way is in our asset base finance business,
right in our warehouse business, and in all the different
areas that we are leaning into. I think one of
the things that you know when you think about and
this has been an education for ourselves internally as well
as externally.
Speaker 2 (26:07):
And we'll see if we're successful.
Speaker 3 (26:08):
Like there's no guarantees in life, but you know, when
you think about an investment grade, you know, in exposure.
When you look at the typical public pension plan or
you look at the typical institutional investor, the majority of
what they're doing is in corporate to your point, matt On,
you know, buying the index and getting exposure to both
off the run and on the run exposure and bonds.
Our view is that, you know, that is one area
(26:30):
to get investment grade exposure, but also asset base finance
where you can get higher yields right now, and you
can if you are able to pick your spots across
a very diverse set of opportunities, you can really be
able to achieve a little bit of excess spread married
with some of these larger private corporate opportunities. That's how
(26:50):
we kind of get to the math of getting you
to that, you know, multi hundred basis points of exs.
Speaker 1 (26:54):
Spread today, is it sustainable? I mean, can you continue
to make that next year and the year.
Speaker 2 (26:58):
Off to I think it's going to be.
Speaker 3 (27:00):
And I think that we our view is that the
private markets are only expanding, right, And so I think
that if you believe like we do, that public markets
and private markets are going to converge and that means
that private markets will likely expand, then yeah, there might
be some spread compression, right because you will see more
private credit becoming more and more mainstream, which would define
(27:21):
you to have more compression and spread. I think that
as long as we can continue to be discerning and
not have to put out risk. So what I mean
by that is we don't have a business where we
have to put out x hundred million or x billion
dollars in resume marketers. We can be like, okay, resine
marketers right now are interesting or not interesting, and we
(27:42):
can really ascertain and then within that where are the
interesting areas to be in to not be? And so
I think if you are able to app consistently try
to uncover where the relative value is, you should be
able to outperform. But to your point is that what
is the magnitude? I think that remains to be sae.
Speaker 1 (28:00):
One of our guests recently said, in the contexts of
this market and the growth of it, everyone wants to
be Apollo, which is obviously flattering, but also there's a
target on your on your back. So how do you
stay ahead? I mean, what what do you how do
you innovate? How do you I mean, it can't all
just be scale. Obviously you were there a bit earlier,
but you know, how do you maintain that edge?
Speaker 3 (28:21):
It's very it's very kind that your guests said that,
but but I but I do appreciate.
Speaker 2 (28:24):
I think from.
Speaker 3 (28:25):
Our perspective, you know, we I would say Mark is
done and Marcron has done an incredible job about trying
to figure out where is the puck going and so
whether that was the evolution of our you know, exposure
to private credit building beyond just direct lending, through to
asset base, through to investment grade now kind of you know,
(28:47):
we've built our business candidly in our third party investment
business or through a party capital business, predominantly via the
alt's bucket right, which which we've talked about. I think
it was pretty it's pretty interesting that we're now thinking
about Okay, how do we utilize or really vast experience
via retirement service business to think about the fix income allocation,
(29:08):
which is a completely different part of the portfolio that
we weren't really necessarily targeting before.
Speaker 2 (29:13):
And so I think just trying.
Speaker 3 (29:14):
To make sure that we are understanding where trends are
going and how to really make the most sense for investors'
balance sheets. Part of the reason why some people lose
and we haven't been immune to this either, is they
come up with an idea that makes a lot of
sense for their business, and then it's about how do
you get that into and investor's hands and commercialize that
(29:34):
versus what are the needs that we're trying to solve
for and how do we make pensioneer's life better? And
I think by having I know, I keep saying it,
but this retirement services mindset, it allows us to do that.
Speaker 2 (29:46):
First.
Speaker 3 (29:47):
Mark's also been pretty vocal about how, you know, the
retirement business, the retirement industry for the US in general,
is something that needs to be you know, shaken up
a bit, right when you think about the four to
one k's that all of us have and the fact
that you can't get also in those businesses or in
those portfolios. That is an area that we think is
another is another room to grow. So I think for us,
(30:09):
it's about just making sure that we understand the state
of play, but aren't staying static and are thinking ahead
in terms of how to incorporate what we know in
broad based way and.
Speaker 1 (30:19):
How do the regulators come into that.
Speaker 2 (30:21):
It's a great point.
Speaker 3 (30:22):
So I think that you know, one of the things
that people always say is, you know, we aren't necessarily
regulated like a bank, which is true, but we are
regulated like an insurance company which has its.
Speaker 2 (30:31):
Own federal state number.
Speaker 3 (30:33):
We have, we publish all of our positions, We have
to be hyper transparent. It is an incredibly regulatory, regulatory
driven environment and business to be in, and so we
spend a lot of time with the regulators and we
want to continue to make sure that we are being
transparent and operating invest in class. And so you know,
whether it's the new administration or you know, other areas
(30:54):
of government, I think that you'll find that we will
try to be constructive to get to the best outcome and.
Speaker 4 (31:00):
Pensioners and retirees like I am one of those retirees
who has is part of that seven and a half
trillion dollar four oh one KPI. So is this is
this an opportunity that only guys like Apollo can can
take place in or is this something that I can
participate via ETF or some other mechanism, because these kind
of returns with you know, single a tier credit quality
(31:21):
is pretty impressive. No.
Speaker 3 (31:24):
I think that our goal, again speaking you know, high level,
is that you me, everyone can benefit from, you know,
utilizing private assets in your portfolio, whether it's a four
to one.
Speaker 2 (31:35):
K or otherwise.
Speaker 3 (31:36):
And you know, we are really working with a number
of different partners to figure out how to introduce you know,
our assets, our business, et cetera in ways that can
be consumed via these markets that have historically been very
ETF and mutual fund heavy. You know, we you know,
we're just added to the SMP a week ago, which
was a huge milestone for us. It shows the institutionalization
(31:59):
of our business, our strategy. It was a great testament.
But also it allows, you know, if you believe, in
some way, broader investors to get access to private markets
via our company. And so whether that's through you know,
just the broad based exposure through the SMP, or for
us to be able to get more included and provide
assets within ETF and mutual funds over time that should
benefit everybody.
Speaker 1 (32:20):
But if I look at the S and P, I mean,
I just keep making twenty percent every year by doing nothing,
and if it all goes wrong, the Fed's going to
come in and help. Why should I get into something
really esoteric that I don't understand and it's all you know,
there's no transparency and it's you know, it's just weird stuff.
Why would I do that and not just you know,
the easiest thing.
Speaker 3 (32:40):
It's it's hard to argue with when when you put
it that way, I think that like anything right, it's
it's about diversification. And so certainly the S and P
has just been completely a really strong asset to be in.
And to your point, I think that the new administration
is definitely going to be focused on supporting that, and
to your point, the FED will also be focused on
supporting it. So it's it's a great puct and continues
(33:00):
to have perform. But just generally speaking, having some diversification
in your portfolio is probably prudent.
Speaker 1 (33:06):
On the fundraising side. I'm interested in also how you
compete there because you know, there's places like for example,
the Middle East where there's you know, tons of interest,
there's tons of capital, but also loads of competition. I mean,
is there something that you do, particularly on the fundraising
side that gets you more mandates.
Speaker 4 (33:20):
Yeah.
Speaker 3 (33:20):
I think that we We've been very fortunate in terms
of our ability to raise capital globally. I think that
investors are getting you know, on the institutional side and
also candidly on the weld side, but also talk institutional first,
are really you know, getting more and more sophisticated. Obviously,
they're looking for broader partnerships, They're looking for creative ways. Right,
It's not only about having XYZ fund that you can
(33:44):
kind of invest in. It's that plus having a broader
partnership approach providing additional access. It's about you know, you've
seen in the press. We've worked with many large Middle
Eastern sovereign wealth funds to help stand up businesses and
provide us working capital in partnership with RIGHT and so
being able to have that relationship and not just be
so linear has been I think a big attribute to us.
(34:06):
And then our growth on the well side has been
I think tremendous. Some of our peers have done an
amazing job in wealth, but we have really spent a
lot of time and effort bringing the alts business alongside
our peers to the well channel, and it's still incredibly
underpenetrated when you think about the underlying constituents, and so
I think being creative. You know, you talked about complexity
(34:28):
right in terms of why would I be why would
I go down the complex route?
Speaker 2 (34:31):
But when you think about you.
Speaker 3 (34:32):
Know, BDCs and very basic access points for investors in
private credit, you know what's the next leg of that?
How do you get asset based finance in that structure?
So we're working through a lot of these things that
we think will ultimately be beneficial for wealth as well.
Speaker 1 (34:47):
You mentioned BDC's they are getting more pick interests, they
are you know, some of them are struggling. We are
hearing more mends, more extends, all that stuff. So you know,
this asset class is not without risk. What are you
saying right now that kind of worries you in tons
of the private markets.
Speaker 3 (35:05):
I think that all the things you mentioned, they are worrisome.
I think we if you look at our you know,
non traded BBC, we're very proud of the stats as
it relates to our peers in terms of pick and
other metrics. But that being said, it's an industry wide issue,
and you know, if an investor or several investors or
hundreds of investors have a bad experience, that will influence
(35:27):
the broader, broader market. I also think that, you know,
the gating mechanisms can be viewed in a positive or
negative light. Sometimes investors don't like to be gated, which
makes sense, but equally that protects their interests over time
and hopefully mutes volatility, you know, in terms of their experience.
And so I think that just making sure that we
as an industry are really focused on making sure that
(35:50):
the bar for what we're investing in is high, muting
volatility for end investors, and really trying to ensure that
we're not going down the path of any or a
bunch of lemy that's going to create more noise in
a structure that's supposed to be first, lean and safe
risk is really all that we can kind of ask for.
Speaker 1 (36:09):
I'm sure you're doing it, but there's so much cash
coming in in all markets, and there aren't enough deals,
and you know, there is therefore room for error you know,
we've had people on this show talk about how it's
not them that's going to do the bad deals. It's
the tourists, you know, it's other people that will you know,
mess up potentially. Do you see any signs of fraus
in this market, any signs that you know that some
(36:30):
deals are getting done that maybe shouldn't get done.
Speaker 2 (36:33):
Absolutely. I mean, I think that we've been seeing this.
Speaker 3 (36:35):
It's funny because I'm sure you've been having this conversation
for a long time, and every time you think that
the private markets are at their tippy top, they're just
fire and higher and higher. And so there's certainly we
are passing on a lot of transactions. We are really
trying to be thoughtful. I think our business is unique
in terms of obviously we need to maintain the expectations.
Speaker 2 (36:57):
Of our investors in terms of deployment.
Speaker 3 (36:59):
And it's a push because investors come to us and say,
we credit spreads are tight, but yields are high, and
we want to be invested and we want to cash
hield and we want to make sure that we're in
the ground now married with what don't mess it up,
don't do something that we don't want to do, and
we want to make sure that you're still sticking to
your knitting in terms of the risk reward that you're taking.
And so we try to really be very prudent in
our deployment and ensure that we are being actively transparent
(37:23):
with investors in terms of pacing. But certainly there are
deals that are being done that we are passing on.
There are deals that are in our sub investment grade
business where there is a lot of you know, we've
talked about credit or and creditor violence, there's a lot
of lme when we engage in that, we try to
make sure that we're bringing the majority of the debt
stack along with us so that we're not going to
have future you know, debate and litigation. So it's about
(37:47):
just making sure that you pick your spots.
Speaker 1 (37:48):
Do you expect that to get worse though, as we
you know, have more inflow and potentially less net supply
across the board and fixed income and that's certainly what
we're seeing. Is twenty twenty five going to be a
year of you know, risky deals getting done.
Speaker 3 (38:02):
I think twenty twenty five will be a year of
higher rates, likely a strong economy, likely some buoyancy when
it comes to M and A deals. Probably some kind
of disparate treatment in sectors, particularly if you think about
the tear of certain things like that that might impact
certain geographies in certain sectors, and likely a continued bid
(38:23):
for private assets will which will create deals that are
done that probably shouldn't get done. You know, the triple
C part of the market is you know, yielding significantly
higher by design, right, because they are riskier types of transactions,
and so from our perspective, we just think that staying
top of the capital structure first, lean in really high
quality credits is where you are probably safest, and we
(38:46):
try to avoid some of those other transactions.
Speaker 1 (38:49):
Are there any sectors that you think of particularly risky
at the moment in terms of the US economy.
Speaker 3 (38:54):
I think that, you know, the most obvious one is
kind of autos, right, I think just given some of
the protectionist tariffs that might in particularly with Canada and Mexico,
we're a little bit bearished at now on the electric side.
Hopefully that will be you know, offset in some degree.
We are bearish like most people in terms of office
within CRE and what that means for retail and the like.
(39:16):
But generally speaking, pretty constructive overall.
Speaker 1 (39:20):
I'm interested in also your global view because everybody's loaded
up on US assets. Global is in your titles, so
hopefully we can draw you to other countries. But you
know what else is out there in terms of opportunity
for Apollo not US.
Speaker 3 (39:36):
I think that we are obviously very Our business is
very much focused on developed markets, so the US is
obviously the biggest part of that. Developed Europe is another
big part. You know, we have north of four hundred
people in Ourope in our London office, so we are
really building our European capabilities across both direct lending in
the subinvestment grade market as well as in asset base finance.
(39:58):
It's a little bit more challenging right now asset base
financial just because, as you may know, there's a lot
of EU securitization risk retention laws that we were trying
to contend with. But equally, we think that there will
be opportunities to really construct portfolios that meet the criteria
of those regulations in a way that really hasn't been
done or at least in the scale that we hope
(40:19):
to do. And then you know, we're constructive on cire
X some of the things that we talked about.
Speaker 2 (40:24):
In Europe as well.
Speaker 3 (40:25):
Asia, we have a very large business as well, but
it is much more idiosyncratic in terms of the opportunities
that we tend to pursue. But we have a large
business out of our equity as well as our hybrid
equity businesses, so prefs and converts and things like that,
and then we pick our spots very specifically when it
comes to EM oriented opportunities. So it's a smaller part
(40:46):
of our business, but something that will probably grow over time.
Speaker 1 (40:48):
In Europe, is there any particular country focus.
Speaker 3 (40:51):
We do a lot in the UK for obvious reasons,
given our focus on kind of you know, safer yield
and mostly the UK, which is where we're spending a
lot of our time on cire and asset based finance.
Speaker 2 (41:04):
We will do some opportunities.
Speaker 3 (41:05):
For example, we've done some sports financing and media rights
from Portugal and Spain, which are more idiosyncratic, specific to
those circumstances where you're able to get long term contracted
cash flows based on meteor rights that have been agreed
to with you know, one or two parties. And then
we've done a couple of deals in France.
Speaker 1 (41:25):
And the like, and in Asia, any particular countries that
you tend to be more focused on.
Speaker 3 (41:29):
Where we've spent more time is what I call it
a pac generally speaking. So we've done a number of
deals in Australia and New Zealand, which obviously are much
more developed. We've done a couple transactions and I'm talking
credit you know, less so on the equity side in India,
but likely more of the you know, established markets is
where we tend.
Speaker 1 (41:49):
To focus interested instead of circling back to where we started.
This forty trillion number which constantly intrigues me. How soon
do we get there?
Speaker 2 (41:58):
I think we're going to get there really soon.
Speaker 3 (42:00):
Do I think that, you know, a lot of market
participants are starting to privatize.
Speaker 2 (42:06):
The asset based market. We're not alone in that, So
I think you're going to see.
Speaker 3 (42:09):
A lot more private credit offerings and strategies focused on
asset based and then you know, the investment grade part
I think will continue to you know, we'll work with
large companies and start to privatize more of their balances
over time.
Speaker 2 (42:23):
So I think I think we will get there soon.
Speaker 1 (42:24):
But what is it now in terms of just asset
based we.
Speaker 2 (42:27):
Estimated it's like twenty twenty trillion dollar.
Speaker 1 (42:29):
Market already, yeah, and could be forty when you say
very soon. Obviously, journalists we always look for numbers when
what give us a year, Come on, give me exact year.
Speaker 2 (42:40):
But I would I would, I was inspect within the
next five years you.
Speaker 1 (42:43):
Can okay, interesting, okay, And then in returns, I mean
you talked about how you know, the competition there will
be compression, convergence, all that stuff, but presumably if you
don't continue to offer excess, then you're not going to
grow at that rate. So you know, next next year returns.
Have you got any kind of number you could put
(43:03):
on that?
Speaker 3 (43:05):
James, you're really putting me out here in terms of returns,
I think that, you know, we we still think that
you can get you know, a couple hundred basis points
of access spread compared to the relevant benchmark across the
board if you kind of.
Speaker 2 (43:18):
Are, okay, taking a more private and illiquidity risk and.
Speaker 1 (43:21):
That's a next year, that's a next year cool, okay,
And then if you just had to put your finger
on one opportunity, I mean I do this every time,
and I know it's pity hard when you're a global person.
But single best credit market opportunity in terms of relative
value for next year, we.
Speaker 3 (43:36):
Actually think that they opportunity in there's it's hard to
say because we actually think there's a lot, but we
think commercial real estate is actually very very interesting in
terms of you.
Speaker 2 (43:46):
Know, where we are.
Speaker 3 (43:48):
There's been a lot of dry powder in the real
estate equity business and we saw you know, a twenty
to thirty percent repricing generally speaking, because people were very
bearish commercial and we didn't see the distress come through
outside of our and so that's an area where you
can really lean in and still get really interesting opportunities
if you're selective and if you're focusing on really interesting areas.
Speaker 2 (44:09):
And depending on.
Speaker 3 (44:10):
How you define commercial real estate, that can also include
financing of data centers in the like.
Speaker 2 (44:14):
So that's an area that we think is really interesting.
Speaker 1 (44:16):
Is that in the US, in the US, any particular
place in the US, any regional So.
Speaker 2 (44:20):
I think for US, we spent time well.
Speaker 3 (44:22):
I think travel has held up a lot better and
people expected and so we've worked with some of the
large hospitality programs across the US. Residential, you know, commercial,
but like for you know, broader areas within Florida have
been interesting just given the migration there.
Speaker 2 (44:41):
And then when you think about data.
Speaker 3 (44:42):
Centers and the like, you know, areas which have really
strong connections to the power grid, whether that's northern Virginia,
the texasssays, and certain areas North Carolina where we are
focused in terms of that area.
Speaker 1 (44:56):
You know, I'm a warrior. So what keeps you up
at night worrying about? You know, the market? I mean,
I generally people are very very bullish for next year.
The conference that that I was talking about, everyone was
very very excited about credit for twenty twenty five. And
yet you've got, you know, all the stuff going on
that I mentioned at the start. You've got you know,
potentially the FED has to pivot. That's what people would
(45:18):
be very concerned about. Then there's too much demand and
not enough supply. So those are things that worried me.
Speaker 4 (45:23):
What about you?
Speaker 2 (45:24):
I think you're right.
Speaker 3 (45:25):
I think if the FED pivots, that could be you know,
a big that would likely be difficult for the market
to digest. I think that, you know, for credit investors,
you know, higher for longer within reason is a great thing.
If that were to kind of completely reverse, you know,
we'd have to figure out other ways to attract and
(45:46):
return the returns that I mentioned. I think that, you know,
we're not without geopolitical risk, although it seems like the
market seems to digest that pretty easily for better or
for worse, and so you know, it's I think it'll
be more Our view is it'll be more sector specific
dispersion next year versus kind of broad based market volatility,
(46:08):
because to your point, it does seem like the economies
in a decent place. It does seem like the fet
is pretty much going to stay on course. You know,
inflation will have to kind of be monitored and ensure
that we kind of don't overextend ourselves. But whether that's
kind of the tariffs that I mentioned, whether that's cuts
from DOGE that are potentially forthcoming, who knows what will
happen there, as well as kind of m and a.
Speaker 2 (46:29):
With an m and a, there's winners of losers.
Speaker 1 (46:30):
To our last guests was very worried about group thing.
Is there anything you think you're absolutely contrarian on right
now that you're doing that other people have got wrong?
Speaker 3 (46:39):
I don't know, if it's like we think that we're
doing the others have gotten wrong. I think that we
have very deliberately positioned our business and I don't mean
to sound like a broken record on the higher quality
end of the spectrum. And I think that many of
our peers have built their businesses rightfully so and very
successfully slow on the other side, and so that I
think is a big differentiator for us and will win
out when there is volatile and when investors do you
(47:01):
try to pivot their portfolios holistically.
Speaker 1 (47:04):
Great stuff, Aquila Graywell, Global Head of Credit Products at Apollo,
It's been a pleasure having you on the Credit Edge Money.
Speaker 2 (47:09):
Thanks.
Speaker 1 (47:09):
Thank you, guys, and of course to Matt Goinner with
Bloomberg Intelligence, thank you very much for being on the show.
Thanks guys. Bloomberg Intelligence is part of Bloomberg's research department,
with five hundred analysts and strategists working across all markets.
Coverage includes over two thousand equities and credits, as well
as outlooks on more than ninety industries and one hundred
market industries, currencies and commodities. Please do subscribe wherever you
(47:30):
get your podcasts. We're on Apple, Spotify, and all other
good providers, including the Bloomberg terminal at bpod Go, give
us a review, tell your friends, or email me directly
at jcromby eight at Bloomberg dot net. I'm James Crombie.
It's been a pleasure having you join us again. Next
week on the Credit Edge
Host
James Crombie
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