Business Breakdowns
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: Well, this really speaks to what private credit's pitch and appeal is to borrowers, which is this one-to-one negotiation that allows for more creative structuring, which is really Apollo's bread and butter. So, whereas a large company might want to go to a bank and, let's say, do a broadly syndicated loan offering, that's going to be somewhat of a rigid structure for that. Certainly, if they want to do an unsecured bond offering on the public markets, that's going to be a rigid structure. Apollo wants to be at the table and say, "Hey, can we structure this?" Let's move these assets over here and lend against those. And then we'll take that and tranche it out, and we'll have an investment-grade sleeve that can be fed into the insurance market, and we'll have a B piece that can maybe go to some of these evergreen vehicles or even our ETF. Their ability to originate in more creative ways, and then to take that debt and structure it, and feed the various tranches to pools of capital that meet their requirements, is really what Rowan's vision is here. [00:00:00] S0: In some ways, it makes a lot of sense, just in terms of the bespoke nature. In other ways, when I think of that rigid structure, I also think that's what allows for scalability. When you're looking at a traditional IG unsecured issuance, you probably know the terms without even needing to look up the bond indenture, and you have some sense of it. So, it's going to be interesting to see how that scaling goes, because the bespoke nature can sometimes slow things down.
· Matt Reustle, Hunter Hopcroft
[00:00:00] S0: In some ways, it makes a lot of sense, just in terms of the bespoke nature. In other ways, when I think of that rigid structure, I also think that's what allows for scalability. When you're looking at a traditional IG unsecured issuance, you probably know the terms without even needing to look up the bond indenture, and you have some sense of it. So, it's going to be interesting to see how that scaling goes, because the bespoke nature can sometimes slow things down. [00:00:00] S1: Apollo is not involved in this deal. But if you want to see how creative things are getting, think about the CoreWeave deal, which is basically a $12 billion private credit deal secured by NVIDIA chips. So, things are getting very creative on the debt side. And Rowan is very explicit about the demand for credit and their ability to scale up, with credit origination being the biggest constraint. In fact, he said at a conference in September, "The biggest single constraint on growth is not capital formation. It's not how many people you have. It's really about whether you can originate enough attractive assets to meet your need." And that's why they are so focused—and some might say maniacally focused—on making sure they are building the right type of origination in volumes, in the right places, because that's our whole business is about, "delivering excess return per unit of risk," which is a phrase that Rowan evokes time and time again.
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: Apollo is not involved in this deal. But if you want to see how creative things are getting, think about the CoreWeave deal, which is basically a $12 billion private credit deal secured by NVIDIA chips. So, things are getting very creative on the debt side. And Rowan is very explicit about the demand for credit and their ability to scale up, with credit origination being the biggest constraint. In fact, he said at a conference in September, "The biggest single constraint on growth is not capital formation. It's not how many people you have. It's really about whether you can originate enough attractive assets to meet your need." And that's why they are so focused—and some might say maniacally focused—on making sure they are building the right type of origination in volumes, in the right places, because that's our whole business is about, "delivering excess return per unit of risk," which is a phrase that Rowan evokes time and time again. [00:00:00] S0: Just going back to the shift, the transition to bring something like Athene in house. Again, a very high-level view would be that you took something that is, in some ways, very asset-light, with other people's money, and transitioned this into something that is way more asset-heavy, with an operating business—something that has to manage an insurance book that's going to transform this business model quite a bit. What is the perspective from a business analyst's perspective, and also from an investor's perspective, on how that changes the dynamics of Apollo?
· Hunter Hopcroft
[00:00:00] S1: If you go back to that 2021 investor day with that massive deck and those six hours of presentation, one of the last presentations is Apollo's CFO, and he basically says, "Here's how to think about the business now." In Apollo's supplements, they break out their earnings—now in fee-related earnings. So, this includes things like asset management fees. This is your traditional alt-manager business, spread-related earnings. This is the difference between their liabilities and what their assets are earning on this retirement services and insurance sleeve. And then there's principal investing, which basically houses the carry that they're earning. And despite that initial skepticism, spread-related earnings are now larger than fee-related earnings for Apollo. And last year, Apollo originated something like $200 billion of credit—$222 billion of credit. And that's credit that they are originating, not going out and buying. That's $220 billion of credit that Apollo is originating in-house to feed that spread-related earnings business. To talk about where the firm is today in terms of this business plan, Apollo now either owns or has a role in 16 different origination platforms. And there's something like 4,000 employees spread across those various origination platforms. And they're all relatively niche, with aircraft leasing and music royalties. It's these very niche subsectors that Apollo feels like they can stand up or acquire teams that have a real specialty in those areas to originate this credit.
· Matt Reustle
[00:00:00] S0: Honestly, when I think about those categories, there are some obvious ones in private credit that have really transitioned away from the banks—they are high-quality, asset-backed, and have some type of cash-generating business underneath them all. It'll be interesting to see that $220 billion, if it can continue to grow at the same pace, sticking to those traditional asset classes or if they get continuously creative. Would you say there's any bucket that makes up a significant percentage of that spread portfolio? Is that something that they disclose?
· Hunter Hopcroft
[00:00:00] S1: The issue that credit origination has today—and it speaks to John Zito's comments and the desire to move up market—is that, up into, let's say, 2022, the private credit market was supported by private equity–sponsored lending to pursue LBOs. And that market, for a variety of reasons, has been effectively closed or at least is a lot less active. And so a lot of the demand that was coming on the private credit side has tapered off. And so they've had to get more creative and they've had to go farther afield to look for lending opportunities. And I think a big open question for the industry is: if private equity and sponsor-backed lending do not make a hard rebound, what fills that gap? Because what Rowan's created here—and I do think it's unique to Apollo—is that he's created a bit of a financial perpetual motion machine: you sell an annuity, which creates equity. You use that equity to set up an origination platform that originates debt that goes back into the top of the balance sheet and creates a new dollar of equity to do it again. The more annuities you sell and the bigger your insurance balance sheet grows, the more demand for credit is created. That's why Rowan is so explicit that the single biggest constraint on their growth is now not the ability to form capital—which was how most of these companies were judged. That's where their multiple comes from, being at least in large part based on people's perception of Blackstone's ability to go out and raise another 30 billion fund. Rowan is saying we're off that treadmill now, and our constraint is: can we find and originate the credit we need to meet the demand that we're generating?