Business Breakdowns
· Matt Reustle, Hunter Hopcroft
[00:00:00] S0: Yep, that makes sense. And I guess just on that point you mentioned, it is essentially a form of leverage in many ways. It's a form of liability in the sense that when a fund is retired, when it reaches the end, that capital theoretically goes back to the investors. And Apollo keeps some percentage based on the return profile and the fees that they earned. [00:00:00] S1: I've likened this—and people will certainly push back on it—but private equity is a way of bootstrapping a call option. Let's say that you're getting 20% of the returns above 8%. That is effectively a call option that's 8% out of the money. So LP Capital is a very special form of leverage where the GP benefits if it works out, but it has very little risk if it doesn't, and by Rowan layering on an insurance balance sheet on top of this, which has really long-duration, low-cost capital, you start to see the wisdom of what he's building here.
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: I've likened this—and people will certainly push back on it—but private equity is a way of bootstrapping a call option. Let's say that you're getting 20% of the returns above 8%. That is effectively a call option that's 8% out of the money. So LP Capital is a very special form of leverage where the GP benefits if it works out, but it has very little risk if it doesn't, and by Rowan layering on an insurance balance sheet on top of this, which has really long-duration, low-cost capital, you start to see the wisdom of what he's building here. [00:00:00] S0: How much does the duration play into this? I think it's something that is certainly a theme in the markets right now, whether it's in venture or in private equity. You have funds that reach the 10-year mark, 12-year mark—you get all of your extensions in, and they have these prized assets that might be sitting there, but the market multiple, the IPO, is not that attractive. They end up selling at some discount to some public peer that trades at a significantly higher multiple. And it feels like it's leaving crumbs on the table in terms of the return profile. This is getting brought up a lot where you'll need to see things trade hands. Do you think that plays much of a role just in terms of that theme today, or is this a much bigger evolution for the business beyond that?
· Hunter Hopcroft
[00:00:00] S1: Well, I think as you see Marc Rowan's public profile increase, especially in his recent interviews and the way he speaks at conferences, he's really proselytizing this idea of private and public markets converging. He really focuses on liquidity. And again, it goes back to that original quote about the early days at Drexel of understanding the trade-off between risk, liquidity, and credit. Rowan's argument is basically, if you're a retiree or a future retiree who is 20 to 30 years from retiring, if you are a pension or an endowment that doesn't need money until long in the future, why are you so concerned about having daily liquidity? And Rowan's vision is really to see these public and private assets converge and that wall between the two come down. That's getting very literal here—in the past two weeks or so, Apollo and State Street have launched a private credit ETF which holds some listed credit and some private credit. So Rowan is at least walking the walk in terms of trying to make a case for this private and public divide coming down to decondition investors from expecting daily liquidity. And the way he set up Apollo today really speaks to that.
· Matt Reustle
[00:00:00] S0: Yeah, he's a great spokesperson for the private markets. I heard him in an interview mention that 80% of companies generating over 100 million in revenue are private. And I don't know that you can really take that 80% and apply it to the size of the market because there's a certain scale factor of the biggest companies in the world. But he brings up some strong points just in terms of the evolution of where these businesses can operate and be a hybrid of the two. But you also see them making announcements like having a private credit trading desk, which implies liquidity is something on their mind, I would imagine.
· Hunter Hopcroft
[00:00:00] S1: So this brings up a really important point, especially about what we might consider the future of Apollo and, really, the future of markets in general is the problem of capacity. Annuities specifically are on pace to have one of their best years ever in terms of sales. 2025 is expected to have around $400 billion of annuity sales. All those annuity sales demand essentially new credit creation. And Rowan and Apollo realized that private credit can no longer be simply the purview of high-yield junk bonds or highly levered companies. In fact, I was at the Grant’s Private Credit conference last year, and Apollo's CIO John Zito had a great opening monologue where he talks about French fries. And he notes that the Wikipedia page for French fries has a word count of nearly 4000 and it's been edited over 1400 times. While the private credit, which is, as we've seen, undoubtedly more complex, has just 500 words. And Zito's point is that they want to make private credit more like French fries. There's a million ways to prepare French fries. And they want people to stop thinking of private credit simply as a replacement for high-yield or leveraged loans. They want private credit to be able to do investment-grade origination. They want private credit to be an option for the largest companies on the planet. They want GE to consider private credit versus an unsecured bond offering. And I also think they want to look at the asset-backed market. In fact, they've been very explicit about that. The reason they want to do this, especially with asset-backed or these larger companies, is that they want an investment-grade rating on this stuff. They want to be able to originate investment-grade credit that they can feed back into the top of that balance sheet. They know that private credit needs to evolve beyond this private equity–sponsored borrowing to lever up small companies. They need to move private credit up market.
· Matt Reustle
[00:00:00] S0: Yeah, we're just proving out Moody's and S&P's stronghold and moat when there's so much focus on the ratings of these credits and how much of a role that plays in mandates; it's important to mention that. But on that point, in terms of this shift where alternative managers can make a bigger push up market into investment grade, I think what you mentioned there at the end, especially with the asset-backed securities—if you have a portfolio of aircraft leases, that's something that's very easy to see how it could fit into an investment-grade portfolio—is very different from lending to Apple or picking your A-rated credit that's out there in the market. How is their effort to move into large corporate lending? Is that something that is reasonable to think that they can bite into in terms of taking market share? And what would be the drivers of that happening and banks losing that business if it were to happen?