Business Breakdowns
· Hunter Hopcroft
[00:00:00] S1: Well, private credit has never made a cost of capital argument for itself. It's made an argument for itself on the basis of a one-to-one lender, borrower relationship and an ability to be creative. And I think that's continuing, especially as some of these companies need a creative solution. CoreWeave is a great example of this about lending against GPUs for a business that probably would not have checked many other credit boxes on its own. It's worth noting this interaction with the banking system, though, because while banks have largely been forced out of a lot of these higher-octane lending relationships, they're still very much providing back leverage to private credit funds and to the Apollos of the world. So they found a way. They've explicitly found a way through synthetic risk transfers. But banks have found a way to coexist with private credit and with this private capital lending market in a way that probably raises some additional regulatory questions. But they've fallen into symbiosis, not necessarily.
· Matt Reustle
[00:00:00] S0: Into competition, just bringing this all together with an investor hat on. With all of these changes in the business, I think we have certain rules of thumb or frameworks in terms of banks. You look at an ROE and use that to instruct what the multiple on book value should be. That's just loose framing. But is there an approach today in terms of how the market goes about evaluating and valuing these businesses, whether it's separating fee-based earnings and putting a multiple on that versus everything else? Do you think there's a general framework that's being used by the market today?
· Hunter Hopcroft
[00:00:00] S1: There's certainly a framework that has been established to date. And these have typically traded on a multiple of fee-related earnings. For these companies, earnings per share is pretty noisy. And fee-related earnings, a market cap multiple on how much they were earning from fees, was the way the market priced their growth in assets. And the biggest driver of their growth in assets was their perceived ability to fundraise new and larger funds. There was some degree to which it was the carry accruing from performance, but for the most part, those multiples were a projection of future fundraising ability. Apollo has really broken the mold here by saying that fundraising is no longer an issue. And so I think the way that they are going to be valued is closer to a bank, albeit an unregulated one, in terms of the spread-related earnings and how much spread the market is offering them, and for Apollo specifically, how much spread they're able to originate. And then I think, in the fullness of time, the known unknowns are where credit losses settle out for this type of activity. And so Apollo has really changed the mold in terms of how at least they are being valued, as they've successfully found the exit ramp from perpetual capital raising.
· Matt Reustle, Hunter Hopcroft
[00:00:00] S0: I think those are two simple valuation frameworks for a business that is born out of complexity. If you're an analyst that covers the name, you just have to come up with a complex valuation methodology to give them their proper due. It's certainly interesting to see the evolution of industries and how these things shake out. Everything you mentioned is based on this foundation of logic, which makes a lot of sense in terms of what you have visibility on versus what you don't and the potential for upside. I always enjoy monitoring these things as they're evolving. [00:00:00] S1: I think the biggest theme here, and Rowan is finding his way to speak to this, is we have been referring to this entire episode as alternative asset managers, but increasingly they're not so alternative. I think that these businesses that started out to occupy a niche part of the market have come to dominate a continuously growing portion of the market, perhaps even a plurality. And their business models are evolving from being considered an alternative to becoming integral to the financial market.
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: I think the biggest theme here, and Rowan is finding his way to speak to this, is we have been referring to this entire episode as alternative asset managers, but increasingly they're not so alternative. I think that these businesses that started out to occupy a niche part of the market have come to dominate a continuously growing portion of the market, perhaps even a plurality. And their business models are evolving from being considered an alternative to becoming integral to the financial market. [00:00:00] S0: One thing that we've touched upon, but I would love to get your view of, is the reputation of Apollo. I can speak firsthand from talking to investors where Apollo was a part of the transaction. When they realized that, they screamed profanity and said, "I need to spend a lot more time on this." There was this inherent belief that you might want to build in an additional risk factor and review the documents extra thoroughly. Your lawyers weren't going to be able to go up against their lawyers. So there was in the credit world a lot that came along with the reputation of Apollo. Where do you think that stands more broadly, and do you think it has any impact on their business? It's so interesting to contrast this relative to Blackstone and what's happening over there. So I have that in mind as I ask this question.
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: Sure. I think for most people who participate in financial markets in this area, you're right. Apollo has a reputation for rolling up their sleeves and fighting. I think that's something else that the Rowan era is trying to determine and work through. How much of that to work on, sloughing off, and how much of that to retain. Because Apollo still has a reputation for being very smart, drawn to complexity, and willing to take on difficult situations, which makes them very competitive in the current lending environment. At the same time, they need to be seen as a partner to many of these businesses, not as an adversary, especially if they want to go upmarket and start accessing investment-grade opportunities. I think you're seeing an evolution of that image, a softening of that image. I can't imagine, 10 years ago—maybe even 5 years ago—seeing an Apollo Christmas video. So I think you're beginning to see that, or at least an attempted transformation of the public image. But I do think they want to retain this reputation for being able to take on difficult situations. [00:00:00] S0: Yeah, sometimes PR and outward communications can have a material impact, and you still retain the ability to roll up your sleeves, get a little litigious, and get some extra juice from the banks when you need it. So it's an interesting one. And we're seeing PR evolution around the marketplace across various segments and sectors. So it's no surprise to see it there.