Business Breakdowns
· 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?
· 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.