Business Breakdowns
· 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.
· Matt Reustle, Hunter Hopcroft
[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. [00:00:00] S1: Just quickly on that point, to draw the comparison with Blackstone, I've noticed how proud Blackstone is of their Jersey Mike's acquisition. They keep finding ways to bring up the fact that they bought Jersey Mike's, which, to me, is an attempt to connect with the everyday American by portraying private equity as familiar and normal. And you love Jersey Mike's, and that's owned by Blackstone. [00:00:00] S0: It's a risky endeavor in my opinion, because what I think of private equity is that we're going to be paying some type of subscription service just to buy Jersey Mike's subs, and they're going to dangle some rate of getting $4 sandwiches if you sign up for the monthly rate. But I have noticed it too. It's interesting to witness, and they are trying to get the message out there. So to bring it all together, we like to wrap up these conversations with the lessons you can take away from this business. I really liked how we got into the history and the evolution. But what would you point to as lessons from Apollo?
· Hunter Hopcroft
[00:00:00] S1: I don't mean this pejoratively, but I think in a lot of ways, especially as they've pursued Rowan's vision for the business, they've effectively remade a lot of what made Drexel successful in terms of innovating around these capital structures, innovating around sources of capital, and innovating around how the market functions. And so, just like how Caesars Palace didn't work and they went right back and did Las Vegas Sands, I think they have internalized these lessons all the way back from the beginning of their career, and they saw what worked and what didn't. They have really come full circle into being this huge player in debt markets that is reshaping how financial markets operate. I think the other thing that is becoming more and more important, especially in this environment, is an understanding that the balance sheet is a huge value driver for businesses and for Apollo, how that balance sheet can be self-perpetuating. There is a focus in markets on the income statement. How much earnings are you driving? What multiple can you get on those earnings? And for Apollo and for the market at large, I think there's a lot more realization that a lot of value gets created in asset conversions, in refinances and M&A's, and in changing the capital structure and allocating through the balance sheet, not necessarily just having a rapidly growing top line that gets a multiple applied to it. And then finally, I think Apollo's own history charts the evolution of markets at large probably better than a lot of the other alternative managers do. They started in this debt collapse in the late '80s. They were opportunistic then. They were set on the course they are on today following the collapse of the Great Financial Crisis and its impact on insurers. And now they have moved into the debt-centric market we have today as a leader. So Apollo's rise and fall, and becoming who they are today, really charts how markets themselves have evolved in terms of the growth of private capital and the focus on credit and yield as growth areas. Relative to public equity, but maybe even private equity.