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I'm Tom Keane, along with Jonathan Ferroll and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App.
Live from the city of London, hometol for me, no secret, my favorite city on the planet. And I could say that because we've got a hime audience. Good afternoon, Good afternoon to you all. A special edition of Bloomberg Surveillance from our Bloomberg Global Credit Forum alongside Tom Kean and Lisa Brownitz. I'm Jonathan Ferrow TK. We couldn't aplan to anybody, could we.
Yeah. They came to me like six months ago.
Julie had her people calling me up, and Julie so we got to do this Pale I said I don't want to do it, and I said, you know, okay, we're gonna do this panel, but we need some theatrics.
So she said, look, if.
We can range of fed and the BOE, particularly the BOE five four decision to blow up the bond market. Over forty eight hours, we could probably get Zeldner and that's how this start.
Let's get the two year something close to five, twenty ten year up to maybe four fifty.
Yeah.
But the problem is is that the volatility, as Jim was saying, is all in the two year, the ten year, the thirty year. It isn't in the credit market, which is what you would expect. And people have been wondering, well, will actually matter for the fact that it's getting more expensive.
Yeah, it's real sophisticated yield up, price down, price down means assets are challenged. I don't care what flavor you have here of the ice cream of the fixed income market. The answer is coming out of this. Dare I say what Bojada is tomorrow? We've got moonshots in certain series and what I'm focused on more and this is my first question to Jim, is going to be the ten year real yield.
We're all living this right now, and I think slowly over the last couple of months and then quickly internalizing that high for longer message across various central banks, but particularly the federal reserve. We're internalizing that increasingly, we're seeing it in the treasury market. Risk assets really resilient in the face of all of this. She's talking about it to real anominal ness, psycle highs and risk assets just pretty steady.
Still, there's no question about that in the last eighteen months. But I'm going to go to the memory of Jim Curry out the door at Golden Sachs and Jim Curry and hydrocarbons.
There he said, look, the real yield changes.
It affects everything in the real economy, including all the investments of apollow really everything out There's no question.
Jeff Curry is not in the audience, Jeff, he is this afternoon, Jeff, excuse Jeff Curry.
It's late to day. I did last night.
Three minutes into this. It's funny time from Mark. I'm going to bring in the guest.
I'll bring in the guest right now.
This is fun and it's really fun given where the markets are. He played lacrosse at Duke University, and I went back and I looked at the first day that Jim walked into Apollo, and the real yields about back to where we were in two thousand and six, we've come full circle. First of all, what was the first day like at Apollo, And what does it mean that the real yield, the ten year real yield is now back to where.
It was in six seven.
Well, first of all, thanks for inviting me today. I'm excited to be part of this great road trip, you know, taking back down memory lane. Apollo was a much smaller business back then. We were probably twenty billion in assets. We're six hundred and fifty today. The role of banks was much much different. There was a massive risk appetite that time in the world. But certainly if you go back, I think the world was very different, and I guess I would start out today saying, as you guys talk about,
you know where real rates are. Basically what you're really saying is the cost of capital has gone through a massive reversal. And so all the activity going on in the last eighteen months between all the central banks of the globe, that was the mechanics of getting to this destination.
But now we have the rebounds.
We got out of Bounce for ten years that was priced way too cheap, and you were forced to go into equities and basically debt subsidize massive amount of equity returns.
And so the last eighteen.
Months, you know, the world now has about three hundred trillion in debt on one hundred trillion in global economy. Those numbers are up basically doubled in the last ten years. And when you go from zero to basically four or five percent, that's ten trillion of borrowing costs that have to be absorbed. And so there's a massive balance going on between debt versus equity and versus balance sheets.
So yeah, I get folks, we're gonna turn this into a two hour seminar. Given where the markets are. We're arguing about this, I'm.
Not sure they want this to become a two right now.
Well, the answer is, I'm gonna let least in John do the heavy lifting here. I got one more question, which is the memory of nineteen ninety eight, which was about leveraging the system. It was about shadows in the system. Now that we're back here, and with the first and second derivdives of how we got back here, where are the shadows now?
Well, certainly the wherever there's an asset liability mismatch. SVB was a perfect example. At people talk about regulation. It was just a simple not how you operate a financial services business.
Where are there.
Al mismatches you certainly, I don't think it's in the world of private credit. I think is probably a lot of consumer finance challenges around the globe right now. You've got way too much public debt right now.
There's challenges.
So there will no doubt be challenges for the next twenty four to forty eight months as you've got fund companies that have funded debt, laiden balance sheets of companies that have funded growth cap x and they cannot pay the piper right now.
Everything you said in your opening remarks is what Lisa wrote about for the best part of a decade, right complaining about the previous regime. We're all trying to figure out if this is truly a new regime or just the moment in time that we move away from pretty quickly. Can we live with where real rights are right now?
Can we live with that?
Well?
I think that it's sort of we're getting back we talked. You say real rates, I say cost of capital. It's cost of capital for everything we do. If you think at the last ten or fifteen years, the growth of technology companies, the growth of biotech. There's some great companies out there, but they were funded with the equity, had all the benefit, and the zero cost of debt is not really sustainable.
So this is the real world right now.
Real rates are going to be higher the cost of capital as we go back to this balance, and I don't think it's a surprise this week as we were talking about earlier the ft ed by the two finance ministers of France and Germany talking about the European financial services sector and the role of banks.
So there's a parallel path here.
Conversation about how companies finance, how they get access to capital, the role of savings and securitizations.
So it really is all tied together.
Although are we really living with rates where they are? I mean, we take a look at these average rates, we see them in the numbers, but that's not what anyone's actually paying. Companies have already turned out their debt.
So are we living with it?
Are we going to see what it looks like to live with it in a year?
I think we're not seeing it.
So to highlight that comment, the mechanism, the transition mechanism which the feather would like to see in slowing down the economy, which we all expected, it's taken a lot longer. In the US, you have a mortgage market with thirty year mortgages at a three percent interest rate. You have the high yual market with a six percent coupon and an eight year duration. So the real impact of higher costs around the globe, in the US and Western Europe,
it's not been felt yet. And so when people say, well, we're going to have a soft landing, I'm skeptical. I see a world where financial conditions have gotten tighter, and it's just a question of how long that transition mechanism, which will probably be longer than it's taken in the past.
There are a couple different ways for us to get to something other than a soft landing. There's the crash and then rates going back down, and then there's something where it's just sort of a stagflation light or a stagflation proper, where rates remain high for a very long time and growth just slows substantially. It seems like the market is leaning into the ladder. How much does that change your perception of what's going to happen in.
The credit space.
Well, this conversation is going into one where we need to get torched in here because he's the economists of POWO, not me. But certainly what you're talking about is an environment where growth is more challenged and with how to companies access capital with a new price of marketplace. Certainly you have challenge whether it's in Germany or in the UK with a slowing economic growth. But there's a variety of aspects that we would see. Unemployment, while still very low,
it's going in probably a more challenging direction. Delinquency needs are going up, the faults are going up a little bit, in the leverage loan market, in the high oal market, recoveries are lower. So there's a lot of points would say to you that there's going to be a more challenging tightening financial conditions. But certainly for us, the US has been quite strong, the UK, there's still a lot
of areas to lend. There is on Western Europe as well, so I do I guess the theme that I would take away from this is that we're going from a decade of a real imbalance where the equity was the big beneficiary, debt paid a crazy price. That balance has been completely changed to one hundred eighty degrees, And now how do companies navigate, how does the financial services, how to banks, how to alternative asset managers? How do we all balance and navigate this marketplace ahead of us?
Is this the return of the bond vigilantes?
Then, well, I.
Do think when people talk about when the central banks are going to actually lower rates, I think it will happen well before they actually get around to it, just like it happened on the upside in terms of rates. There's no doubt that one of the challenges of the last fifteen years of the regularory environment is you've had so much capital withdrawn from these marketplaces in terms of trading desk capital, So the amount of capital to trade one hundred or a billion dollars of ten year treasuries
right now, that has a greater impact. So there's no doubt that any kind of activity in the secondary markets will have a pronounced impact. And that's that's just that's just the way of the regulatory impact post GFC. But for us, I mean, if you're in my seat at Apollo, there's been four trends since I got in the business. There's been massive technology improvement, there's been massive globalization, there's been massive deregulation, and the fourth there's been a decline
of interest rates. Other than technology, you're probably having those tailwinds be massive headwinds as an investor now, so.
How do you navigate that? How do you organize yourself?
But I do think in terms of investors, it's a time to be a.
Big technology change is the Bloomberg terminal.
Everyone needs a blomback time and everybody is out the pitch. We done this, Okay, We're done. Earlier in the conversation, Jim mentioned that joint op ed that was in the Financial Times. The headline, for those of you didn't read it, we must close the EU Capital markets gap. Can you talk to me about how Europe goes about doing that? Because me, Tom, Lisa, this whole audience has heard that a million times in the last ten years.
How do we close that gap?
Well, I think let's talk about how we got here. We got here a POSTGFC where a lot of tools that have been used to push risk out of the banking system that I think have been successful in some regions of the globe. The European regulators took a different view. They took a dim view of securitizations. I would argue that if you look at securitized product that's actually been very good for the banking system and aggregate, it's push
risk out to the real owners of risk. If you look at other things that they talk about about shareholder activism.
But I do think.
There's got to be an embracing of these types of tools to allow greater activity, because I think it's creating a bit of financial services stagnation.
Tursan Slot called me up one day and he said, you know, you really ought to look at the Austrian piece. So I loaded the boat in the ninety seven year Austrian bond that really has worked out well. I'm don like seventy percent or whatever. Tell me about what duration is going to do and choice of duration is going to do given this new environment back to six seven o eight.
You know, again, when I think about the world, I think about long duration.
But we what we do, we do what Apollo is, We're.
Really trying to figure out places where we're not taking credit risk or duration risk. I'm just creating great spread. So whether it's fixed income replacement, I certainly believe that the world has been on that textbook of if you want to make money in fixed income, you got a duration.
I think that's it's an interesting way to look at the world.
I think you're getting paid right now and risk free rates to some degree.
Whether they go a little bit higher or wider.
I certainly know for us at apollow for us, whether it's in the investment grade world, public and private, whether it's in private capital. When we can make high single digits ten percent being a lender, that's a great business.
Do you headge into that? I mean we do.
We are our business. If we are most of our business is unlevered. But if we do have any kind of leverage in our business, we match alm complete asset liability matching all the way through.
So it's better for you now, right private or public. You said that private is sort of immune, and yet a lot of people think it's just not traded. So you can't see some of the carnage that you see in some of the IPOs of arm sure and instacart.
So what's your view there, Well, I think certainly if you look at an aggregate, it's hard to make money in the public markets. Is an aggregate statement equity and debt, certainly with the valuations where they've backed out in terms of where rates are right now or risk free rate. Yes, there's some opportunities in the investment grade world, but if you look at high yield indexes and leverage loan indexes, they're arguably rich. They're rich for a lot of technical
reasons and so our ability. Again, when we talk about private credit, most people you talked about earlier, they talk about really the sponsor finance market. The reality is, whether it's inventory finance, trade finance, solar finance, there's a massive thirty to forty trillion dollar opportunity in terms of the TAM. So that's where we're spending most of our time creating great safe spread yield really on investment grade companies.
This sounds like a bank, Well, I would say is we are a credit lender.
We provide credit, and we do it in a manner where we're not using a balance sheet that we can lose deposits tomorrow. We have long tail liabilities and we match those.
A lot of people have said, particularly in the banking sector, they're going after their lunch and that they have to follow pretty significant regulations and you don't have to, and you have fixed capital and it's kind of what it sounds like in terms of the size and the scope that you need to achieve. It's kind of taking on a lot of the functions that banks used to fulfill. Is that the business model right now?
Well, I think our business model so if you look at our six hundred and fifty billion today, three hundred and fifty billion comes from retirement services, balance sheets, fixed annuities.
The other half is the GP model.
We're able to lend money to air France, to Venovia, the big German real estate companies. We can do that in a manner where we are solving the company's problems, and many times we're doing it in conjunction with a advisor or a bank. There's a narrative out there that we win, the banks lose, or vice versa. The reality is we are doing more in collaboration than we've ever done before. We have a big venture with BNP and
Inventory Finance. They've got an amazing franchise. We partner with them so they can manage their capital in a more efficient way. But the reality is there's more collaboration. And people say, are you frenemies, are you opponents? Are your competitors it's all the above. We work very closely with them and they work closely with us.
To make some news.
There was a headline yesterday Apollo looking to raise about two point five billion to len in private markets, according to people with knowledge of the matter. We're talking to someone with knowledge of the matter.
Maybe, are you.
Looking to raise about two point five billion dollars to lend a private markets?
You know, we're an active player in the extension of senior loans to sponsors. We're active in many of these businesses. We've got a four hundred and twenty five billion dollar credit business. The fact is we built this business not expecting real yields and absolute yields to beat these levels. We thought it was going to be lower for longer.
We created all these origination platforms. So the reality is today investors around the globe are clamoring and they're saying, way, on a risk adjusted basis, we can do this in the credit markets or in the debt markets.
Why do we need to take that equity risk?
And I think that's why you're seeing a preponderance of conversations about from sovereign funds to foundations to pensions around the globe. Saying we can make what we had to take equity risk in the past. We can do it on the death side of the balance sheet.
I think, yes, yes, you are looking to raise two point five Well, we're recently, we.
Have a we have a large platform, we're one of the we're one of the handful of great players in the world.
We're raising How.
Does that work? Do you make like six phone calls? I mean, you know, I travel quite a bit.
If you ask my family, I travel a little bit more than those six phone calls. But you know, we we have several thousand LPs around the globe, and my schedule could be packed up going to visit.
I can see a policy.
Are right now, Jim, you were not meant to say yes.
Just keep talking and answer the question. Jim.
Let's go back to spring. Spring was really messy. Banks failed in America, and I remember sitting down and we had guests come on the program with a some Bloomberg surveillance, and lots of guests said, we started a process here, it's the end of the cycle. There's going to be a hard landing. It's only several months ago.
What was that.
I think it was a expectation of what was happening at that moment was going to happen uh completely. And the reality is this is a big, broad global The consumer plays a massive role in it. Back to my common earlier about three percent mortgages on thirty years, The
US consumer really has not. We may have taken rates up, but the real impact of this higher cost, the second, the third derivative, it's early still, it's really early, and I think that's the difference between you know, there is no doubt the health of the US consumer has what allowed us to extend the economic cycle. But I don't think I think they're eating through some of their savings.
And there's no doubt that there's a more that the tightening of financial conditions is going to be out there, and you know, we're finding more companies coming to us trying to solve their financing needs going forward.
There are other firms challenged because they decided they were going to go off and do something different, new, original, and they're selling things for a haircut. You're probably involved in those transactions. How do you avoid worse practices? You guys have grown this thing from next to nothing. The private world is in right now.
You're doing brain drain.
You're taking all the smart guys from Wall Street over opile.
Everybody knows the ballet.
How do you avoid the worst practices we observe every day on the show where things blow up through the street.
Well, the biggest accident you can do as you grow is to offer people liquidity on ill liquid assets. And so I don't think it's a surprise. We don't. We're not in the business of offering daily liquidity in any.
Of our products.
We run our products, we really match the assets to the liabilities, and again I think that's really a core to how we.
Run our business.
The second is we've for the last six seven years, we've continued to go senior senior senior in the capital structure. We're doing more investment grade companies. We're doing larger companies. Witness what we've done with as I mentioned earlier, Air France, or At and T or Venovia, big quality companies. So also when we underwrite something, for the most part, we bring in partners. We want others to take a look at what we've done. We're really good at underwriting credit
at risk. We brought a lot of that credit oversight that is so valuable at many of the financial institutions. But we have to make sure we're really measured and we focus on the three businesses that we're in right now.
Jim, what are you doing with the books they already hold of debt and equity that is valued much lower. I mean, it's one thing to talk about future lending opportunities, Sure, what about the ones he already did?
Well, let's talk about our business.
So today I have the six hundred billion equity is around the sixth of our business about one hundred billion. We've been very very clear in our private equity business in our flagship vehicles to fund more so with fixed rate debt and really extend those maturities. For the most part, we have been really not levering to the max. If you could lever companies five six times, we typically borrow lent, borrowed about three to four times, so we were we didn't we didn't borrow as much, and we did it
for term at fixed rates. That's really important that what we learned in eight oh nine it wasn't we were the smartest guys in room, is that we had the best capital. And if you had the best capital and didn't get pulled away from the table. That's usually a critical aspect of success.
That takes us to our final question to wrap things up with the Jim, in a world of high uncertainty and low confidence, do you have a high conviction call looking at in this market right now?
Well, I think that you have to assume.
I think there's going to be what we call some big fat pitches out there, the reorganizing and the restructuring and the refinancing of the entire CIRA universe. You have to be marshaling resources around that. You have to make sure that if you are lending capital today, you're doing so on senior basis with a tremendous amount of equity underneath you. So for us, I mean certainly, we're in three businesses. We've been very, very disciplined about what we've done.
We have had a lot of human capital. It's been amazing for our company to pivot and grow. But really to make sure that we stay true to our alignment, our risk adjusted returns and making sure that purchase price does matter. Are very focused on the creation value of our businesses.
Man, you lost.
Last night is that what happened against the opportunity is that we go to the Glass.
And yeah they lost to the Garry Kanes.
So anybody I was trying to make some news, Yeah, I'm trying to make something. You want to buy football clupy.
You know, we we have an active you know, we have an active lending business, and we've done a variety of things in the world of sports entertainment.
But we really are to know this time.
Can we have a run of applause for Pollows Jim's outside. Jim, thank you, Thank you very much, and thank you to all of you for joining a special edition of Bloomberg Surveillance Life for the City of London.
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You can watch us live on Bloomberg Television and always on the Bloomberg terminal. Thanks for listening. I'm Tom Keen and this is Blomber